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More Government = Lower Wages

Posted: August 24, 2012 at 4:30 pm   /   by

Check out these data from the inimitable Azizonomics:

Wages and salaries as a proportion of GDP in blue, contrasted with government expenditure as a proportion of GDP in red:

Yes; correlation does not prove causation. Yes; there are lots and lots and lots of other factors involved — the end of Bretton Woods, globalisation, deindustrialisation, the birth of the computer and the internet, financialisation, the United States’ growth into a global imperial power and more recently the beginnings of a decline.

But whatever the exact causality this does not make happy reading for those who lean toward the idea that more government involvement in the economy translates to a bigger share of the pie for the working class.

No, correlation is not always causation, but look closely. Some of the peaks and troughs actually match up, especially in the latter years. It looks as though even on a short-term basis, there is some correlation.

What government spends, it must first take from the private economy. Maybe there’s your answer there, nice and simple. Money is taken out of the private economy, and lo and behold, wages go down. Coincidence . . . . ? There are other possible explanations, but sometimes the simplest route is the most accurate one. Government has to get its money from somewhere; it doesn’t just grow on trees. Taking that money will surely have some effect on the private economy.