Scottish Labour Income: A Puzzle

The publication of the latest Scottish National Accounts Project (SNAP) quarterly accounts data on 13 November offers some interesting insights into, and raises a few questions about, the behaviour of labour income in Scotland.

Back in November 2012 I noted that contrary to a recently expressed STUC view, drawing on UK data, that labour income shares were falling, there appeared little evidence for this in Scotland from the SNAP data. The latest revised SNAP data to the second quarter of this year are presented in the chart below.

These data still show that the labour income share was rising in Scotland between 1998 and 2001. This might suggest that there is an absence of secular decline but clearly we do not know what was happening to the share before 1998. What is clear from the latest data though is that the share was declining from 2001 to 2011 - from 66% to just above 60% - whereas in the earlier data such a fall was not so evident.

However, the new data also show a clear uptick after the third quarter of 2011 with the share rising from just above 60% to nearly 64% of GVA and then dipping slightly.

The next chart shows the absolute real compensation of employees.

What the two charts suggest is that between 2001 and 2008 while the share of GDP going to labour was falling real compensation of employees was rising. This implies that labour income was growing but more slowly than non-labour income - e.g. profits - until the start of the Great Recession. However, once the recession started to bite and jobs were shed labour compensation fell and its share also fell, indicating that non-labour income held up much better during the recession.

But the experience after the third quarter 2011 is more difficult to explain.

Both total employee compensation and its income share began to rise. The first response is to suggest that rising total employee compensation is due to net job creation. But the data don't support this. Employment picked up from the trough of the recession in the middle of 2010 but then fell back again in 2011. The recent surge in employment did not occur until the end of last year. But the data do show growth in average employee compensation, as the next chart shows.

What we don't know is what this means! The rise in average compensation peaked in the third quarter of 2012, when job creation picked up again. That might be explained by more part-time jobs being created but the fall in full-time employment and rise in part-time employment pre-dates the change.

So, we have a puzzle. Labour income has been rising from 2011 until recently both overall and as a share of GDP. This appears mainly to be due to rising average remuneration and not net job creation. But I am not clear why average remuneration should have been rising when full-time employment was falling and part-time employment was increasing. Moreover, we know that at the UK level average earnings have been growing more slowly than consumer price inflation, implying a fall in real incomes and the implications that must have for household demand. Yet, from these Scottish data a fall in real incomes is less evident - although it must be noted that I have used a GDP deflator and not the CPI index to estimated real compensation.

Could this be one reason why household spending in Scotland has been stronger than anticipated?

Comments

[Linda]

Interesting trends. Just a thought but could rising average remuneration be the consequence of organisations reducing total employee numbers through redundancy programmes, resulting in upward drift of senior management into vacated higher paid roles, while lower paid vacated roles are dissolved or replaced with part-time workers within organisations?