The Great Divide: Examining Labour Compensation and Dividend Growth

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The Great Divide: Examining Labour Compensation and Dividend Growth

Executive Summary

In the last two decades, dividend payments have experienced extraordinary growth. At the same time, the UK has experienced a period in which real wages have barely shifted. This vast divide runs through the heart of our economic model - a symbol of the shift in the balance of power between labour and capital.

This analysis breaks down the comparative levels of growth in real-terms between income from dividends on the one hand and labour incomes from wages and salaries and employer social contributions on the other, using data from the quarterly UK Economic Accounts, adjusted for CPI inflation and growth in the working age (16-64) population.

Key findings:

  • Dividends have been in rude health since the 1990s at least, and barely flinched in the face of the Global Financial Crisis. Real wages have meanwhile been notoriously stagnant over the last 15 years.  
  • Absolute nominal dividends have grown from £48 bn in 2000 to £191 bn in 2019, the year before the pandemic, during which period dividend payments were temporarily hit, while labour pay was artificially propped up by the furlough scheme.
  • After accounting for CPI inflation and growth in the working-age population, this works out to just 25% cumulative growth in total labour compensation for UK households, versus 142% growth in dividend payments by UK-based private non-financial corporations (and only 18% for wages and salaries) – a multiple of nearly six-fold.
  • Between 2000 and 2021 the corresponding figures are 32% and 108% respectively.
  • As an illustrative exercise, if we leave unchanged the sum of these figures, but hold split between worker pay and dividends constant at its 2000 level, then total labour compensation would have been 8% higher in on the eve the pandemic than it was. This amounts to £2.1k per working age adult (split roughly between £1.7k in wages and salaries and £400 in employer social contributions).

These figures are intended as purely illustrative, and are subject to caveats. Labour pay refers to the household sector as a whole, including workers from the public and financial sectors, while the dividend payments in question refer only to the private non-financial sector. Therefore the pool of workers whose stagnant wages are the counterpart to buoyant dividend payments is smaller than our 16-64 population. In this narrow sense, £2.1k is a conservative estimate of the shortfall in labour pay.

Moreover, we are focusing on the perspective of the corporations who pay these dividends and wages, not only the overall returns to capital. This therefore excludes other forms of return, such as capital gains, but also ignores the amount of capital invested on which shareholders are seeking a return, which may be large due to equity price inflation. In any case, if ever greater payouts to shareholders is a condition of the financial sector’s continued buy-in to the real economy, we need to question whether our system of capital allocation is capable of delivering what it purports to.  

While one can quibble over the details, the basic pattern is clear: the pressure upon companies in the real economy to disburse free cash to shareholders has grown stronger over time, while workers have borne the cost of this through stagnant pay, not to mention chronic under-investment in real productive capacity. This is evidence of an economic model which privileges the interests of shareholders over workers. In light of the tremendous pressure placed on working people during the current crisis in living standards, this divide feels all the more stark.  

But it doesn’t have to be this way. We can create an economy where working people have a much greater share of the wealth they create and where we raise the productive capacity of the economy as we transition toward a post-carbon future. To do so we need to rebalance power from capital to labour and revive the role of public investment as central to stewarding our collective futures.

Our latest research briefing, from Mathew Lawrence and Amelia Horgan – endorsed by eight think tanks – sets out the reforms to employment and company law and the welfare state needed to make this change a reality.

Full Text
The Great Divide: Examining Labour Compensation and Dividend Growth