Category Archives: wage growth

Issue Entrepreneurship and the ‘Sleeping Giant’ of Income Redistribution

I was listening to BBC Radio 4 News in March (22/3/23) and was particularly interested in an interview of Sushil Wadhwani, who runs his own asset management firm, and for three years was a member of the Monetary Policy Committee of the Bank of England.  His CV is that of a mainstream fund manager.  In the interview he mentioned his surprise that corporate profit margins had remained so high despite the cost of living crisis.  Serendipitously the Financial Times published a chart on its front page that day on corporate profit margins in the United States which I have copied below. What is very clear is that in these hard times not everyone is suffering.

It seems to me, and to many of those I speak with, absolutely astonishing that this disparity is allowed to continue. With inflation pushing so many households into poverty, it feels bizarre that there has been no major party clamouring for an adjustment which eases the burden on those who are struggling and increases the demands on those who appeared to be doing well through increased taxation. 

I often wonder why few of the opposition parties appear willing to tackle this head on. There is obviously a strong moral case for shifting the burden away from those who have been forced into food banks and making difficult “eating versus heating” decisions over the past six months, and onto those “with the broadest shoulders”. Furthermore, there is also a strong economic case. In a country like the UK, which is suffering severely from anaemic economic growth, it is obvious that tilting the tax system in a way which put more disposable income in the hands of the bottom third of earners, at the expense of the top third of earners would increase economic growth. This stems from the fact that the marginal propensity to consume for those at the bottom must be nearly 100% (they will spend all marginal income on essentials and perhaps repaying debt) whereas extra income for the wealthiest in our society is not spent on consumption but rather in pouring more capital into financial assets.

The only reason a cynic like me can think of is that opposition parties, like the government, receive their campaign funding from the wealthy who are typically antagonistic towards the redistribution of income.  Also, talk of redistributing income has the feel of a “third rail” issue for politicians—touch it and you go up in smoke.  I am no longer certain this is the case.

I have been studying “orphan issues” like this for my master’s degree at UCL. These are just sitting there waiting for “issue entrepreneurs” to pick them up and run with them, as they seek the support of the electorate.  This concept of “issue entrepreneurship” seems to have been developed by theorists Sara Hobolt and Catherine de Vries in a 2015 article (“Issue Entrepreneurship and Multiparty Competition”).  In it they introduced the concept but also identify the circumstances under which political parties may or may not grab hold of such issues.  There are two primary points they make, the first is that “political parties are more likely to become issue entrepreneurs when they are losers on the dominant dimension of contestation”, and that these “parties will choose which issue to promote on the basis of their internal cohesion and proximity to the mean voter on that same issue”.  It remains to be seen if these propositions are correct and if the current opposition parties are willing to take the risk.

In prior research, written in 2007 by Cees Van der Eijk and Mark Franklin, (“Potential for Contestation on European Matters at National Elections in Europe”) the authors identified the issue of EU integration as a potential “sleeping giant”, ready to dramatically shift political behaviour in Europe.  This issue had lain dormant for some time but was seized upon by Eurosceptic and far-right parties, with notable success.

I wonder if the UK Labour party has an entrepreneurial bone in their political body………….   

(PS—this post was written weeks ago, but I forgot to hit “send”.)

Rodney Schwartz

London, UK—23 April 2023

I started my career in mainstream finance and shifted into impact investing before returning to my lifelong passion of politics in early 2021. This blog reflects that return and is my way of sharing the impressions of someone journeying from “proper jobs” in the investment world back into education to study politics after four decades. For those interested in why I started this blog click here, and to read my declaration of known biases, click here. I welcome any comments

Market orthodoxy, embedded inflation and fair wages

Inflation across the western world is skyrocketing. Consumer prices across the developed world are rising to near double digit levels—levels not seen since the 1970s. Similarly to the 1970s, a rapid increase in the price of oil and gas has been the main contributor. The war in Ukraine has catalysed a surge in energy and grain prices, and both are causing wider knock-on effects.  This is causing one of the worst cost of living crises in modern times.

Governments and central banks are rightly concerned about rising inflation. It imposes extraordinary hardship on citizens (especially the poor) and squeezes government budgets. On top of this there is a concern that inflation, which with substantial effort and cost appears to have been eliminated in the 1980s is now returning with a vengeance, thus threatening to undo all that arduous work.  The fear is that inflationary expectations get ‘embedded’ into the economy thereby making it harder to control.

Interest rate increases are a tool of central banks to bring inflation under control by dampening demand. Higher rates raise borrowing costs which, at the margin, reduce economic activity. However, in the current environment, it is ridiculously hard to argue that the economy is overheating—far from it.  The global economy is very weak due to Covid, the war, and other factors, but the primary cause is the massive increase in energy costs.  Raising interest rates will weaken growth and do nothing to address the cause of higher inflation.  Their effect will be to push the world economy into a recession.  This might have been a time for REDUCING interest rates, had central banks acted more prudently in past years.  I suspect they were under pressure from the finance sector to keep money loose, which supported asset prices—and this seemed excusable with inflation at seemingly low levels.  Now we are paying the price for this error.

Let’s return to this idea of embedded inflation and how to address it.  Inflation “getting embedded” is a euphemism used by officials for wages which (heaven forbid!) might match inflation.  Central banks and many governments are nearly hysterical about the need to resist this at all costs.  There is no matching angst regarding corporate profit margins—or CEO pay, for example.

The chart below illustrates the share of GDP in the United States which is represented by labour or corporate profits[1]. Notice how labour share of profits has fallen since the 1970s at the same time as share represented by corporate profits has risen sharply.  Maybe its time for some reversion of corporate profits to the historical mean?   Perhaps companies can help prevent inflation from getting embedded by raising prices at less than the increase in costs?  Profit margins might suffer a bit (from historically high levels!)—but is this not preferable to forcing the lowest paid to make choices between heating and eating?

And why do the arguments about “irresponsible pay increases” only apply to low paid workers?  It seems that CEOs have no worries about their own role in embedding inflation.  The chart below[2] shows how US CEO pay packages have risen in comparison to the pay of workers.  Is it simply inconceivable that only average workers should suffer as we ward off embedded inflation?

The next chart[3] shows how labour’s share of output has steadily declined, especially in developed economies.  Is it not time for some correction?  Given labour shortages across the western world, is there not a simple solution to entice staff back to work—just pay them more!  Why does the market orthodoxy of supply and demand only apply in the case of CEOs or banker’s bonuses (the UK just loosened the cap on banker’s bonuses, amidst this cost of living crisis)?  Do only the high-paid need to be “incentivized”?   

Paying workers in line with rising inflation in the current environment is hardly inappropriate–in fact, it’s essential, and any decent objective observer would say the same—in fact, they might say its time workers to catch up a bit.  However, I do not hear this at all. Yes, labour union leaders seek more money for their members, but I do not hear the broader point that in the interest of the nation we simply must reallocate between corporate profits and workers.  And why should these pay increases only approach the rate of inflation? Why should they not match or even exceed it? And while it is true that in the short term profit margins may suffer, we will avoid a social and economic cataclysm.  I also believe that the trendline of economic growth will accelerate if we undertake this shift. The poor and those on moderate incomes have a much higher propensity to spend any incremental income–it is sensible from a growth perspective that we put money in their hands instead of continuing to enrich the rich and the owners of assets.  Who is more likely to spend incremental income, the rich or the poor?  No points for a correct guess.  (I may write a separate blog post on this subject.)

That companies simply “have to” pass on costs (labour or materials) is just taken for granted–almost as a natural law of physics. However, the notion that workers should receive pay increases which support them to keep up or just about keep up with the rise in costs is heresy of staggering proportions. This orthodoxy needs to be challenged.

This is not just about markets, but political choices.  Governments are restraining pay increases for low-paid public sector workers to grapple with inflation.  What they should do instead is pay these workers more, raise funds to cover rapidly rising debt levels by increasing personal taxation at the high end (and lower it at the low end?), increase (not decrease, as the UK is proposing to do) corporate tax rates, and they should, as some countries are, institute “windfall taxes” on energy companies for the unusually elevated level of profits realised merely as a result of the war.  Failure to do so risks social unrest, poor health outcomes (as the poor starve, freeze and are unable to procure health care) and economic weakness as demand suffers.  In any event, they should junk the rule that says workers always have to shoulder the burden of fighting inflation.

A courageous politician would seize on this theme. Where is he, or her?

Rodney Schwartz

London, UK–14 October 2022 

I started my career in mainstream finance and shifted into impact investing before returning to my lifelong passion of politics in early 2021. This blog reflects that return and is my way of sharing the impressions of someone journeying from “proper jobs” in the investment world back into education to study politics after four decades. For those interested in why I started this blog click here, and to read my declaration of known biases, click here. I welcome any comments.


[1] Taken from a PGIM (division of US financial firm Prudential Financial) Fixed Income Division report, dated April 2021, written by Nathan Sheets and George Jiranek, downloaded 17 August 2022

[2] Financial Times, 13/10/22

[3] Financial Times 12/10/22