labour's share of income

So why did profits to GDP increase, and why has this gone, ever so slightly, into reverse?

A partial explanation is globalisation. There is no doubt the force we call globalisation creates wealth, and it most certainly has supported the rise of emerging markets and reduced inequality between the richest and poorest countries. But it has surely created inequality in the west.

The IMF calls it the globalisation of labour and it’s very real.

John Higgins, Chief Markets Economist, at Capital Economics said: "We think that the downward pressure on labour’s share that has resulted from globalisation will abate. Indeed, there is evidence that the pace of globalisation has already undergone a structural slowdown. The profit margins of foreign subsidiaries are also unlikely to keep on rising, as the global pool of cheap labour gradually dries up."

But he did say that “labour’s share is unlikely to rebound to the 64%, or so, that prevailed at the start of the century.”

But there may be another factor at play and that factor is technology.

Economic theory says automation should not lead to job losses or lower wages – but then economic theory is lousy at allowing for time. Sure, in theory, in the long run, in equilibrium, technology should not destroy jobs – but the long run is an elusive concept and equilibrium only really seems to exist in text books.

But McKinsey has a much more interesting take. It reckons that technology is set to reduce barriers to entry, leading to new start-ups encroaching on the territory that currently belongs to the big corporates, eating into total profits. Of course we are already seeing evidence of this in the start-up scene.

If McKinsey is right, wages are set to rise, profits fall, the GDP cake will grow, but there will be an awful lot of changes at the top.

So there you have it, technology eroding barriers to entry may solve the problem of inequality and social disenfranchisement – or will we instead we see a new ubiquitous uber economy, in which every task has to be pitched for and there is no job security whatsoever?

See also: Should we abolish corporation tax?