The Great Divide: examining labour compensation and dividend growth

In the last two decades dividend payments have experienced extraordinary growth. At the same, 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 £48bn in 2000 to £191bn 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 8 think-tanks - sets out the reforms to employment and company law and the welfare state needed to make this change a reality.

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Key Points

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Notes

This is simply a back-of-the-envelope calculation, intended for illustrative purposes only.

We are not presuming that there is a fixed pot reserved for payments to workers and shareholders, which is then split accordingly. At the very least, however, it is an index of the changing balance of power between labour and capital, without making any specific claims about what mechanisms are responsible for this shifting distribution.
We exclude interest payments, which is subject to changes in interest rates, and is being paid on debt that is more likely to have been issued to finance new investment. In any case, this doesn’t make a large difference to our conclusions.

The biggest caveat is that dividend payments are attributable to UK-based corporations even if they are paid out of profits and revenues that are largely derived overseas. Our comparison between the trajectory of worker pay vs dividends is therefore not strictly on a like-for-like basis, but, this consideration only dilutes our results insofar as there may also have been an increase in the proportion of UK-based corporations’ profits being derived from overseas.

Methodological details

Variables being compared

Labour compensation:

Wages and salaries plus employer social contributions. This therefore excludes self-employed income, but dividend payments are subject to the same exclusion, so we consider the comparison consistent.
Does not include welfare/benefit income.

Dividends:

Dividend payments by UK-based private non-financial corporations deemed by ESA 2010 guidelines to be resident in the UK, plus

Time period:

We therefore use 2000, the turn of the millennium, as our comparison benchmark. It is also from 2000 that the increase in dividends has been most marked and most stable. Our comparison period therefore comprises both Labour and Conservative governments.
We compare 2000 against 2019 instead of against today because the onset of the pandemic (a) disrupted dividend payments temporarily from what was otherwise a secular increase; and (b) led to wage and salary income being artificially sustained by the furlough. Dividends have again started recovering more recently. We therefore consider the 2000-19 comparison a more instructive picture of the direction of travel than the 2000-21 comparison.

Using the 2000-21 comparison window would dilute our results, yielding a 8% differential in labour compensation, as opposed to our 14% headline mentioned above.

Deflator:

CPI, but everything is expressed in 2021 prices.

‍Population:

Our figures are expressed on a per capita basis, but dividing by the working age population (16-64). We could have otherwise chosen to divide by the number of employees (excluding self-employed), or the number of hours worked, which presumably would have led to an even greater differential than what we record, since self-employment and hours worked have both increased disproportionately over the last decade.

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