The economy is often simplified into a trade-off between capital and labour. The owners of the manufacturing plants, tractors and computer servers want to pay as little as possible to the workers. Meanwhile, workers, as is their prerogative, demand as much pay as they can get.
It is along this dividing line the UK’s two main political parties have emerged. In theory, the Conservative Party are supposed to lower taxes on corporate profits and make it easier for companies to hire and fire employees. Meanwhile, Labour are expected to fight for workers’ rights, increase taxes on corporate profits and redistribute wealth via public services.
If society was a constant back and forth between labour and capital, then you would expect to see company profitability and workers' real wages move in opposite directions. As workers claimed more rights, they would demand more pay, which would eat into company profitability.
However, the world is a lot messier than this Marxian perspective suggests. When the Conservatives took power in 2010 under David Cameron, the net rate of return for non-financial companies in the UK was 9.9 per cent, according to the Office for National Statistics. The net rate of return is effectively the profit a company makes as a percentage of its total capital. A higher percentage means it is using its capital more efficiently, leading to higher returns for the owners.
And, as theory suggests under the Tories, and with the country emerging from the financial crisis, profitability improved and hit 11.9 per cent by 2014. However, this turned out to be a high mark for the Conservatives, and by 2019, it had dropped to 10.1 per cent. In 2022 it was down to 9.7 per cent.
Falling profit margins wouldn’t be an issue if workers were being paid more. However, since 2010, workers have not become materially richer. There have been some ups and downs in growth rates, but the headline story is that between 2009 and 2022, real average weekly earnings in the UK have risen just 2 per cent.
On top of this, the Conservative austerity programme cut public spending, meaning fewer police officers, prison overcrowding and smaller armed forces. Meanwhile, an ageing population is increasing the burden on the NHS, with one in nine people now on waitlists. This is dragging on the health of the workforce, with 2.5 million young workers unable to work because of long-term sickness, including back pain, musculoskeletal issues and long-term Covid-related problems. In the past 14 years, people’s standard of living has degraded, and it is completely justifiable the Conservatives suffered their worst election performance in 200 years.
There is an upside to this though. If companies, workers, and the NHS can all get poorer at the same time, they can all get richer together as well. Taxes can be tweaked around the edges, but if Labour wants to improve the standard of living, it can’t just be about redistribution. It needs first to create stability to encourage investment, and then improve our infrastructure and lower the cost of trade.
These measures will improve company profit margins, increase investor returns and boost real wages. The economy doesn’t have to be a zero-sum game and politics doesn’t always need to be framed as a series of trade-offs. What is good for one can be good for all.
