Hybris of high skills and high wages: explanations of dysfunctional growth models must take into account more than the distribution of national income between labor and capital


The theories of “growth models” explain capitalist diversity by referring to the changing drivers of aggregate demand in different national economies. Nick O’Donovan expands the framework of growth models beyond its conventional focus on debt-driven demand and exports, through an analysis of Thatcher’s vision of a proprietary democracy and Blair’s knowledge-driven growth agenda . Using data on the distribution of wealth and wages, he highlights how the two approaches have failed to generate sustainable demand; in Thatcher’s case, because of an insufficiently wide distribution of the ownership of capital; in Blair’s case, because of an insufficiently wide distribution of lucrative knowledge labor.

In recent months, the UK government has repeatedly invoked the idea of ​​a highly skilled, high-wage economy. In his speech at the 2021 Conservative Party conference, Boris Johnson claimed that his party “solve the national productivity puzzle … by investing in skills, competencies, skills‘. Rishi Sunak’s fall budget argued that “providing world-class education to all of our people” would help create a “an economy with higher wages, higher skills and higher productivity‘. Hence, social investment in the human capital of workers will increase their productivity, thereby enabling them to earn higher wages.

If this endeavor were to succeed, it would lead to a marked change in the UK’s ‘growth model’. In recent years, political economists have used the concept of “growth models” to explore how the sources of aggregate demand shape social, political and economic outcomes. Is growth based on business investment, household spending or net exports? Is it supported by increased productivity or by increased borrowing levels? Is it mainly motivated by increase in wages or increase in profits?

Prior to the global financial crisis, the UK’s growth model relied heavily on consumer spending, supported by borrowing largely driven by rising house prices. This ‘privatized Keynesianism‘saw households rather than government intervene to support demand by going into debt, a growth model that collapsed dramatically with the financial crash. Despite this trying experience, the coalition government (voluntarily or not) ended up restore the same approach, dependent on consumer spending supported by rising house prices.

Advocates of an alternative model of high skills and high wages hope that social investment in skills (alongside infrastructure and research) will be enough to raise wages. In theory, this should lead to a process of sustainable growth driven by wages., with higher wages based on higher labor productivity acting as a more sustainable source of consumer demand than borrowing secured against speculative asset price bubbles.

What advocates of this brave new growth model often overlook is that this strategy has already been tried. In 1997, the new Labor government paved the way for a highly skilled, high-wage economy through social investment. In the 1990s, as today, public spending on education and skills was celebrated as a way to improve living standards by increasing productivity and hence wages, and as a substitute for conventional forms of well-being which would lift people out of poverty by giving them the means to find better paid work. Underlying this assertion was an analysis of long-term changes in the economies of advanced capitalist democracies, in particular the rise of the so-called “knowledge economy”. Knowledge-intensive businesses – ranging from software companies to creative industries, from the financial sector to pharmaceuticals – were expected to become increasingly important engines of jobs and growth. ‘Knowledge work’ would also play an increasingly important role in other industries, with skilled workers needed to automate routine functions (such as order taking) in the new digital age.

From the perspective of growth patterns, these changes had the potential to transform the nature of the UK economy. By the 1980s, Margaret Thatcher’s reform program shifted national income towards capital, to the detriment of wage earners (see figure 1). By weakening unions and reducing employee rights, as well as reducing the generosity of social benefits to jobless households, Thatcher strengthened the bargaining position of employers vis-à-vis their employees. Yet because growth has remained stubbornly dependent on consumer spending – because the UK economy has remained firmly focused on wages rather than profit – this resulted in a mismatch between the pro-capital distribution of national income and the increase in wages necessary to drive growth. Under these circumstances, expanding household debt has replaced robust wage increases as a source of demand.

The rise of the knowledge economy, on the other hand, seemed to be able to tip the dial in the other direction. According to the early evangelists of knowledge-based growth, the shift to more knowledge-intensive forms of production would strengthen the bargaining power of labor (at least, qualified labor) compared to owners of capital, as knowledge-intensive production depended more on the supply of skilled workers and less on traditional investments in factories and machinery. As Geoff Mulgan – co-founder of think tank Demos, which would go on to lead the Number 10 Policy Unit under Blair – claimed in his 1997 book Connectedness, “In the 21st century economy, the most precious things are seldom physical, and it is possible to create wealth almost from nothing, or rather nothing more than ideas.” Provided that workers are equipped with the skills they need, countries could hold on to the liberalizing market reforms of the 1980s, while simultaneously giving power back to labor over capital.

Interestingly, at least in the UK the share of labor in national income do recover during the 1990s and early 2000s (see Figure 1), a development consistent with these accounts of knowledge-based growth dynamics. However, this did not herald the start of a stable pattern of wage-induced demand, as the overall rise in labor income has been accompanied by an increase in wage inequalities (see Figure 2).

Distribution issues to growth models. In a wage-induced demand regime, a shift from national income to work should increase consumer spending and thus encourage investment and growth. This assumes that salaried households have a higher propensity to consume than their wealthier counterparts, who receive a disproportionate share of capital income. However, if the same increase in the labor share is itself skewed in favor of better-off households, the wage-induced demand growth will not materialize, as the benefits of growth always flow to those with a higher income. lower propensity to consume. As a result, in the UK, growth continued to rely on household debt and rising asset prices during the 1990s and 2000s, expose the economy to a sharp drop in demand when credit creation and asset price inflation stagnated.

Does this mean that Labor’s efforts to implement a highly skilled, high-wage economy were inherently flawed? Not necessarily. Arguably, the window of time before the global financial crisis hit was too short a period to assess the results of long-term educational investments, many of which were reversed during the era of austerity that followed. If the commitment to a highly skilled and paid economy had continued, wage inequalities might have diminished, because an increase in the supply of skilled labor has reduced the wage premium driven by the more educated, leading to demand growth largely based on wages. This assumes that wage inequality would have been reduced by increasing the supply of skilled workers, and that increasing the supply of skilled workers would not have strengthened the bargaining position of capital over labor. However, to the extent that pay inequality was the product of superstar effects (the concentration of demand on the best performing individuals and firms), rather than the shortage of skilled labor, an investment social increase would have had a minimal impact on the dynamics of inequalities and therefore demand. (It is important to note that the rise of the knowledge economy is largely increase the prevalence and size of superstar effects.)

Likewise, if capital remains important in the age of the knowledge-based economy – whether today’s knowledge-intensive companies need large funds to finance massive R&D costs and long periods of loss while they reach the scale necessary to be competitive – then increasing the supply of skilled workers may simply reduce the price employers have to pay for the labor required to generate returns on business assets. knowledge such as intellectual property, user networks and customer generated data.

In short, there is a risk that creating a highly skilled, high-wage economy will require more than the social investment program abandoned by the austerity predecessors of the current government. Nonetheless, such an investment would at least be a start.


Note: the above is based on the author published work in the British Journal of Politics and International Relations.

About the Author

Nick O’Donovan is Senior Lecturer at the Future Economies Research Center, Metropolitan University of Manchester.

photo by kaleb tapp to Unsplash.

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