Growth: 7.5 Income Measure

The Income Measure Defined

The income measure of GDP adds up all income earned by resident individuals or corporations in the production of goods and services.

It is, therefore, the incomes accruing to the factors of production (excluding transfer payments such as interest, dividends, pensions or other social security benefits to avoid double counting).

The published data are all in current prices.

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The wages share of total income

The Table 7.10: Contributions to Growth by Spending Category shows that the largest contribution to this measure of GDP is accounted for by ‘compensation of employees’, (wages plus employers’ National Insurance contributions).

Table 7.10: Shares of GDP Income by Main Category

(Current Prices)

  Employees Compensation Corporate Operating Surplus Other income GVA at Factor Cost Taxes Less Subsidies GDP at Market Prices
2004 53.7 21.3 12.6 87.6 12.4 100.0
2005 54.0 21.3 12.6 87.9 12.1 100.0
2006 53.4 22.3 12.2 88.0 12.0 100.0
2007 53.4 22.2 12.4 88.0 12.0 100.0
2008 53.2 23.5 11.9 88.6 11.4 100.0

Source: ONS

In 2008, it represented over 53% of the total. This component rose faster than GDP in the late 1990s, peaked in 2002 and has fallen away a little since.

It is surprising that, given the growth of total employment and the fall in unemployment, that wages’ share did not rise more quickly. Now that unemployment is rising, the pressure on earnings will ease and the wages share of GDP could well fall.

The corporate share of total income

The profit share of GDP (as shown by the Gross Operating Surplus of Corporations) dipped during the early 1990s recession to a little over 20%, and fell again in 2001, but has since recovered strongly.

In absolute terms, moreover, this measure of profits at an aggregate level fell 3.5% in 1991 as nominal GDP rose by 5%, a corporate performance that was reflected in a steep rise in liquidations. This was only the second drop (the first was in the troubled year of 1974) since this series began in 1960.

Table 7.9: GDP by Category of Income, 2004-2008

(£ million current prices)

Year Employees Compensation Corporate Operating Surplus Other income GVA at Factor Cost Taxes Less Subsidies GDP at Market Prices
2004 646,351 256,552 151,349 1,054,252 148,704 1,202,956
2005 677,478 266,836 158,485 1,102,799 151,259 1,254,058
2006 708,414 295,422 162,786 1,166,622 159,173 1,325,795
2007 746,384 310,787 173,443 1,230614 168,268 1,398,882
2008 769,662 339,863 172,509 1,282,034 165,846 1,446,113

Source: ONS

Profit share relative to wages

Since then, the corporate sector has experienced a robust recovery. Until 1996, growth outpaced the personal sector (‘wages’) and the profit share rose to 24.2%, a proportion exceeded only once in the previous 25 years.

Although profits growth has eased a little relative to wages, the share is still a historically-high 23%, demonstrating the benefits of a stable economic environment. Even when the economy slowed in 2008, corporate Britain increased its share of GDP.

Table 7.10: Shares of GDP Income by Main Category, 2004-08

Growth within the corporate sector

Within the corporate sector, the non-financial public corporations have been the poorest performing.

The growth of the surpluses earned by the non-financial private companies outpaced the rise in wages in the personal sector between 2003 and 2008.

Much more spectacular was the profit growth of financial corporations, particularly in the three years up to 2008. With the onset of the credit crunch, however, it is unlikely that this can be sustained in the coming years.

Table 7.11: Growth of GDP Income by Main Category, 2004-2008

(Annual % change, current prices)

  Employees Compensation Corporate Operating Surplus Other income GVA at Factor Cost Taxes Less Subsidies GDP at Market Prices
2004 4.8 6.2 8.0 5.6 5.3 5.5
2005 4.8 4.0 4.7 4.6 1.7 4.2
2006 4.6 10.7 2.7 5.8 5.2 5.7
2007 5.4 5.2 6.5 5.5 5.7 5.5
2008 3.1 9.4 -0.5 4.2 -1.4 3.4

Source: ONS