MORGAN STANLEY: 'Piketty is history'

Rockstar economist Thomas Piketty was launched from academic esteem to become a household name by his book, Capital in the Twenty-First Century.

The book caught a lot of peoples’ imaginations with its simple and elegant message — that returns on capital exceed economic growth in the long run, entrenching inequality to an unproductive rentier class.

But according to a note from analysts at Morgan Stanley and LSE economist Charles Goodhart, the thesis is dead. They think that because of major demographic trends and the considerably slower growth of the global workforce, the share of income going to workers will soon start to pick up:

Piketty is history, not the ineluctable future. If these global demographic trends, as we argue below, drove inequality higher, then their reversal could lower inequality too. Labour had lost much of its power to command higher wages between 1980 and 2010. Now labour will become increasingly scarce. The labour share of income, having trended down in most DM economies since 1970, is now likely to rebound.

The labour share of income, which is how much of a country’s GDP is made up of worker compensation, has been trending downwards across the advanced world for years:

But that period coincides with an explosion in the number of workers in the world, and their ability to influence the global economy. The working-age population in China and eastern Europe rose by 300 million between 1990 and 2014, and those workers are much more plugged into a global economy than every before.

Goodhart and Morgan Stanley’s proposal is that this more than anything else is what’s been holding down wages in advanced economies:

If the supply of labour, relative to capital, jumps up, its price (the wage rate) will fall. This is the key to what has happened in the last 35 years. With its supply increasing, not only will wages be lower, but the marginal productivity of labour will also be less. That is exactly what we saw in DM economies.

And if they’re right, that’s going to change pretty shortly. The global workforce was adding about 70 million workers per year in 2005, at its peak. Now it’s declining, and will fall to more like 30 million by the end of the 2030s.

According to the note, it won’t just raise the labour share of income, but reduce inequality nationally, and globally:

The coming reversal of these demographic trends will mean that the future of inequality is likely to reverse too. Rising wages will mean a larger share of national output for labour and falling inequality within economies… Beyond this demographic dividing line, emerging market economies have the ability to play catch-up with developed market economies, given their lower starting point.

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