Has Engel’s Pause come back to haunt us?

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Today’s world of rising inequality, lacklustre wage growth and divisive politics may have a historic precedent, says BNY Mellon chief economist Shamik Dhar.

In the first decades of the industrial revolution something strange happened to wage growth.

As the chart below illustrates, the adoption of steam power in Britain¹ in the final decades of the 18th century helped fire workers’ productivity to new heights. What it didn’t do was create a commensurate rise in those workers’ wages.

According to the Crafts-Harley² estimates of British GDP, output per worker, helped by the fruits of mechanisation, rose by 46% between 1780 and 1840. Over the same period, Feinstein’s³ real wage index rose by only 12%. While output per worker rose, the average real wage stayed more or less constant.⁴ It was only in 1838, some 60 years after the industrial revolution began, that this gap began to narrow and the modern phenomenon of wage growth broadly keeping pace with improvements in productively began to assert itself.

In the meantime, though, the resulting accumulation of capital to Britain’s factory owners led to two outcomes: on the one hand it helped finance the next stage of the industrial revolution through investment in innovation and additional manufacturing capacity – but it also created great inequality between the haves and the have-nots.

Figure 1

The disparity was noticed by a German social scientist by the name of Friedrich Engels – hence the Engel’s pause of the headline – and he drew attention to it in his highly influential study The Condition of the Working Class in England in 1844.

In it, he wrote: ‘‘Since the Reform Act of 1832 the most important social issue in England has been the condition of the working classes, who form the vast majority of the English people. What is to become of these propertyless millions who own nothing and consume today what they earned yesterday?… The English middle classes prefer to ignore the distress of the workers and this is particularly true of the industrialists, who grow rich on the misery of the mass of wage earners.”

Three years on from the publication of the book, and Engels, with co-author Karl Marx, put together The Communist Manifesto. The rest, as they say, is history.

A century and a half later, and we could ask a question: As we head into our own digital version of Britain’s 19th-century industrial revolution are we experiencing a similar ‘Engels pause’?

For Shamik Dhar, chief economist of BNY Mellon Investment Management, it’s a fair question. He notes how, in common with those British textile workers at the tail-end of the 18th century, people today are being asked to accommodate baffling changes brought about by rapid technological change. Where once it was about steam, coal and iron, nowadays it’s about data, artificial intelligence and robots.

And, just like the workers of yore, today’s toilers aren’t really seeing much of an improvement on the return from their labour even as they have become more productive thanks to those advances in technology (see Figure 2). And, just like in the early days of that first industrial revolution, the owners of the means of production – think algorithms this time, rather than textile mills – are fast accruing an increasing share of the profits (see Figure 3).

“Certainly, if we look at data from the US the message is very clear: wage growth has not kept up with increases in productivity over recent decades,” says Dhar. “What is also clear is that the fruits of that increased productivity have, by and large, accrued to just a small segment of higher earners and not to the wider population. It’s perhaps still too early to determine whether that’s solely because of technological change or whether other factors might be at play – but it does raise some interesting questions about historical precedents.”

Source: Economic Policy institute:  Analysis of Bureau of Labor Statistics and Bureau of Economic Analysis data. Accessed 13 June 2019. Note: Data are for compensation (wages and benefits) of production/nonsupervisory workers in the private sector and net productivity of the total economy. “Net productivity” is the growth of output of goods and services less depreciation per hour worked.

Source: EPI analysis of data from Kopczuk, Saez, and Song (2010) and Social Security Administration wage statistics. Reproduced from Figure F in Raising America’s Pay: Why It’s Our Central Economic Policy Challenge, Accessed 13 June 2019.

¹Britain was the first nation to widely adopt steam-powered manufacturing from around 1760 onwards and is credited with being the birthplace of the industrial revolution.
²Economists Charles Knickerbocker Harley and Nicholas Francis Robert Crafts offered an influential reinterpretation of the British industrial revolution in the 1980s.
³Economist Charles Hilliard Feinstein’s ‘National Income, Expenditure and Output of the United Kingdom, 1855-1965’ is a well-regarded reference work on UK economic data for the period.
⁴Robert C. Allen: ‘Engels’ pause: Technical change, capital accumulation, and inequality in the British industrial revolution’, 4 October 2009.

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