In recent decades, the global economy – the overall economic pie – has grown nicely. But more and more of that pie has gone to the owners of productive assets, and less and less has gone to the workers.
To put it in financial jargon: capital has enjoyed a larger chunk of the spoils of economic progress than labour.
In the US for example, in 1960, wages were around 65% of GDP. Profits were 6%. By last year, wages were around 58%, while profits were up to nearly 10%, according to figures from Gavyn Davies’ FT blog.
As a result, corporate profits have been able to continue growing, despite the tough backdrop. That in turn, has helped underpin share prices.
Most people I’ve talked to can’t see how this changes in the near future. Davies himself notes that, “it is far from clear why this trend should ‘mean revert’ in the foreseeable future.”
But if something can’t go on forever, then it won’t. And when no one can see how something might happen, that’s when it pays to keep an eye out for warning signs that they might be wrong.
It might just start with the fast food workers of the world…
Fast food workers are fed up
America is seeing what looks like its largest-ever strike by fast food workers, according to online magazine Salon. Workers from various chains are walking out across seven cities, over the course of four days.
What do they want? The right to form a union. And a minimum wage of $15 an hour. That compares to a current average of just under $9.
Big deal, you might be thinking. And yes, it’s hardly a return to the 1970s. In Britain, the miners and other striking industries had the ability to cause chaos. If every fast food worker in America walked out, the worst that could happen is that it might actually marginally improve national health.
Thing is though, that might work in these people’s favour. When a tube driver walks off his well-paid job and leaves you stranded for the day, it’s hard to feel sorry for him.
But if a badly-paid worker in a restaurant you never go to anyway, decides to walk off the job, it’s easier to feel sympathy. And fast food companies are widely disliked in any case.
So it’s much easier for a canny politician to get behind a cause like this. Particularly at a time when popular feeling is that a nebulous group of ‘rich’ folk got away with murder during the financial crisis, at the expense of everyone else.
Perhaps more to the point, a lot of these workers are so low-paid that they also have to claim welfare benefits. This is something that my colleague Merryn Somerset Webb has been pointing out for years now, in her campaign to scrap tax credits and raise the minimum wage. At least one reason why corporate profits have grown as a share of national income is because our taxes go on subsidising their wage bills.
Is that a good use of public money at a time when almost every major developed government is stony broke? Hardly.
This gradual shift in attitude isn’t just happening in the US and developed markets. This is a global thing. For example, in this morning’s FT, China expert Michael Pettis points out that China doesn’t need rapid GDP growth to maintain social stability.
The number that really matters is “median household income.” As long as the lot of the average Chinese worker continues to get better, they don’t care what rate the overall economy is growing at. Chinese wages have been growing for some time. But even there, workers have still lost out to corporations – though in this case, mostly the state-backed ones. The only way for China to rebalance successfully, says Pettis, is to allow a “significant transfer of resources from the state sector to the household sector.”
Is it time to go ‘long labour, short capital’?
This is all very interesting. And I’m sure you have your own view on the politics of it all. But in practical terms, what does this mean for investors?
When trends of any sort reach extremes, it’s often time to bet against them. So how do you go ‘long labour, short capital’?
There are two major implications.
Firstly, industries and companies that have based their success on a steady and willing supply of cheap labour will find it harder to grow profits. This could either happen because they need to pay their staff more. Or it could be because they have to invest more money in order to mechanise their operations. (Can it really be that hard to fully roboticise the average fast-food outlet? Push wages up high enough and we’ll soon find out.)
One way or another, it’ll mean less profit for shareholders. At a time when many companies in the US in particular are priced for perfection, that could get ugly for share prices.
However, it’s another good reason to look at investing in the robotics industry – we last examined the sector late last year, and we’ll be looking at it again in the near future.
Secondly, inflation could become more of a problem, more rapidly than anyone expects. Consider the UK housing market, for example. Our government has embarked on a re-election scheme that involves favouring the existing owners of houses (capital) at the cost of renters and people who can’t get on ‘the ladder’.
If there’s one thing that might get people angry enough to start demanding a fairer distribution of the spoils of economic progress, then this is it. Britain already has stubbornly high inflation. If wages start rising to match, it would make life much, much harder for the Bank of England. It’s yet another reason to avoid gilts.
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