Are we in another Engels' Pause?

Dr. Jonas Steeger

During the UK industrial revolution, wages kept stagnant whilst GDP grew explosively. This situation is frequently called an Engels' Pause. Today, we may experience a similar situation and economists fear the effects. Are we in an Engels' Pause? We take a closer look. See for yourself!

Engels' Pause

About GDP & Real Wages

Over the past ten to fifteen years the German economy has been interesting - to say the least. Germany has proven quite resilient. The economic crisis took its toll around 2008/09, no doubt. Layoffs and temp work arrangements surged and the ever so important export ratio fell quite a bit.

An interesting way to illustrate the effects of the 2008/09 financial crisis is captured in the ratio of non-performing bank loans. The falling trend was disrupted during the crisis and Germany saw a swell of new non-performers.

Non-performing loans from banks to total gross loans (%) in Germany over time

But the German economy bounced back quickly, soon treading path on the good old and familiar growth trajectory once again. The amount of non-performing loans quickly fell (though it's rising again at the moment... ) and employment was soon surging again. It was no surprise that the equally familiar discussion on a general shortage of labor is back on the table.

If labor supply is low, wages should increase

However, the assumed shortage is debatable. The line of reasoning is simple: shortage is likely to be reflected in rising wages. High demand and low supply equals higher prices, right? But real wages - on average - have recently remained quite stable.

In fact, between 2000 and 2017, average annual wages merely grew by about 6.000 US Dollar (from roughly 42 $k to 48 $k in constant prices 2017 USD PPP). Meanwhile, the GDP per worker - a common indicator for productivity and growth - almost doubled in the same time.

German GDP per worker in US Dollar over time

Following the classic supply-and-demand theme, a situation where low labor supply, high demand, and low wages coincide simultaneously should not really exist. Given perfect markets at least... So why do we have it nonetheless? Is labor in fact not short?

UK and the Engels’ Pause

Maybe labor supply is less short than widely believed. But possibly, we are dealing with another phenomenon. That is: a matching problem. History might explain our situation today. Let's take a closer look:

In the first few decades of the nineteenth century, the UK experienced a similar situation at first hand. This period is commonly referred to as an Engels' Pause.

Why Engels?

Friedrich Engels described the situation where real wages stagnated whilst GDP grew explosively in the UK in his famous piece The Condition of the Working Class in England. Taking it as inspiration, British economic historian Robert C. Allen coined the time between 1820 and 1840 „Engels’ Pause“.

But next to the relationship between wages and productivity, other circumstances seem to resemble today's news headlines, too:

  • Income inequality was growing significantly
  • Urbanization took off as more and more people wanted to live in the cities
  • First appearances of disruptive technological change - namely the Industrial Revolution - came up on the horizon
  • Frustration among the working class grew and an uproar for political and economic change soon came to fruition

As we know today, mass production prevailed and catapulted Britain to new highs and a long-lasting position in the front seat of global economic growth.

In comparison, the Engels' Pause was - in hindsight - rather short-lived. But it still lasted a couple of decades. Wages increased again from around 1840 on and started to move parallel to the GDP per worker again.

GDP and Real Wages in the UK over time

Why did wages not increase more quickly?

There is quite a debate on this particular question. One explanation is the mere distribution of labor. The technological advances in the agricultural sector led to a rural exodus. City population surged and the supply of labor in these areas far exceeded demand.

Hence GDP per worker grew, but competition among workers kept wages in cities and around factories stagnant. So supply was indeed high - but more due to hardship.

In addition, the needed skillset to operate machinery and alike were in low supply. Getting a job often meant sacrificing former levels of income. The alternative was no job at all. It just took some time until labor education provided what the new working environment demanded.

In summary: the supply of labor was not short - but the kind of labor demanded was not matched.

The role of capital

Part of the Engels' Pause is the accumulation of capital. As technology rapidly advances, the savings rate rises. Investors save to invest into process improvement and new technology. Hence, an Engels' Pause tends to coincide with capital accumulation.

The resemblance to the 21st century is striking

Looking back a couple of centuries is almost like looking into a mirror of time. Present-day conditions such as the role of intelligent technology, inequality in the distribution of wealth, and the changing nature of the workforce bring about a striking resemblance.

So, are we in an Engels’ Pause today, too? It remains to be seen. But it is indeed possible. Especially the looming sword of Damocles - i.e. Artificial Intelligence - is widely believed to significantly alter the workforce. Rapidly increasing technology in blue- and white-collar jobs again might lead to poor wage growth, worker redundancy, and excessive capital accrual by capital owners. In short, we might be dealing with another Engels' Pause after all.

Transformation needs to happen now

What is there to do? For one, we suggest to closely monitor the broader economic situation. It is important for business owners, workers, and consultants - everyone really - to keep the described dynamic in mind. But in a more hands-on manner, we strongly believe that now is the time to start tomorrow's transformation. On a microeconomic level that is.

Especially the German Mittelstand and family-owned businesses are addressed here. Former industry leaders may fall back if they are not transformed into more nimble corporations that can roll with the punches offered by an evermore turbulent global economy. Investment in new technology and labor education is needed now. The German Automotive and Retail industry tell part of that story already.

Falcon can help!

We wrote quite a bit about business transformation. Some of the many examples are to be found in this article. The major lesson learned is simple: business transformation is extremely difficult. That is why we developed Falcon. Falcon is a web-based project portfolio management software! Many of our clients exclusively use Falcon to future-proof their businesses. Interested? Just try Falcon and get in touch. It's free: 30 Day Free Trial


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