The labour share of the United Kingdom’s national income increased by six percentage points in roughly three decades, due to factors such as National Minimum Wage, employers’ social contributions and growth in the service sector.  

Labour share represents the part of the country’s income that goes to the workers, which includes contribution to employees like wages and salaries, mixed income allocated to the self-employed, and the employers’ social contributions.  

Office for National Statistics reported a significant rise in the labour share between 1995 and 2001, followed by stability at higher levels in subsequent years.  

Benjamin Caswell, a senior economist at a think tank, said that the introduction of National Minimum Wage, change in the composition of self-employed individuals, and structural changes and reforms in the 1990s likely led to the stark increase. 

The rise of a dominant service sector and legislative interventions played a crucial role in stabilizing the labour share in the United Kingdom. 

Caswell, currently working at National Institute for Economic and Social Research, suggested that the service sector’s growth potentially elevated the labour share. 

“The service sector is more labour-intensive because it’s a non-traded good—you can’t trade haircuts or coffee baristas, as these are produced and consumed immediately,” he explained. “All else being equal, this could lead to a rise in the labour income share

The positive shift was noted especially in the service sector, which includes distribution, transport, hotels and restaurants, and professional and support activities.  

Total labour income grew more rapidly than the profits and surplus earned by businesses, capturing a larger share in the economy. 

The employers’ social contributions facilitated this growth by 340 per cent increase, more than wages and salaries (at 220 per cent) and mixed income (at 210 per cent).  

These contributions consist of insurance payments, social security, and private funded schemes like healthcare, pensions, and life insurance.  

Caswell also pointed to the Pensions Act 2008 as a minor but notable contributor to upward pressure on the labour share. The act requires employers to automatically enrol workers in pension schemes, thereby boosting worker benefits and influencing income distribution.

The 2024 budget increased National Insurance contribution by employers and lowered the threshold of the income. 

This increase could add an extra burden on firms to pay higher and sooner, which might lead to a rise in prices, followed by wage inflation and the rise in labour share. 

Caswell explained that the rise in inflation would put an upward pressure on wage inflation because as prices rise, people bargain for higher wages.  

“All things considered, you could see slight upward movement in the labour share, you might not see a large increase like in the 1990s to 2000. But I think you would see upward effects on it, but it may be only by one or two per cent of the total.” 

The United Kingdom was the only country amongst G7 Countries which showed a stable increase in the labour share by eight per cent against 1995 baseline.  

The share continued to decrease in the United States and Japan – by roughly five per cent and 10 per cent respectively.   

European nations witnessed stability, with labour share ranging between negative and positive five per cent.  

Office for National Statistics attributed to the decline in the labour share to factors such as offshoring of labour-intensive parts of production to low-wage countries, adopting information and communication technologies and intangible capital assets, and the emergence of superstar firms.