There’s no avoiding the simple truth that wealth is distributed unequally between the UK populace.
Rather than each 1% of the population holding 1% of the wealth, the bottom 10% have no wealth and the top 1% have approximately 20% of wealth. This can be seen by comparing the mean average wealth of a British household, with the median.
The driving factor behind this inequality is the different characteristics of labour and capital.
An introduction to labour & capital
These two productive forces power the British economy. Every adult of working age is automatically a part of the labour economy; we can exchange our time for a wage.
Labour entitles the holder to income which is proportionate to both the amount of time given, and the value of the service. However, it’s necessarily constrained by the length of a working week. Most adults find that they can comfortably work up to 50 hours per week before they begin to feel exhausted and burned out, although everyone is different.
Capital on the other hand, represents wealth and ‘things’. Capital is formed from money and all the things that money can buy. Capital is used to create and finance businesses, which generates a profit over time and will slowly grow.
While the year-on-year growth of a savings account or investment may look incremental, the effect of compounding over time is vast.
Wealth managers are effectively the stewards of capital; they help direct it into productive uses to ensure that it works hard for its owner.
How are labour and capital changing?
The higher wages of employees encourage businesses to become more capital intensive. A company can often save money by investing in digital solutions or automated mechanical processes.
This means that while the average of pay of workers may rise over time, the proportion of business productivity accounted for by labour versus capital is actually shrinking.
Many modern (particularly the hi-tech) businesses employ relatively few employees compared to their gross revenues.
This means that as the value of capital is compounding over time, there is plenty more demand for it in the economy. Businesses are always looking for additional investment or finance to expand their businesses.
Let’s look at a real example to bring this dynamic to life. Back in the 1400s; medieval farming in Britain was virtually a 100% labour business. Apart from their carts, shovels and pitch-forks, a farmer kept their farm alive through the power of elbow grease alone.
In contrast, a modern-day farming business is more like an efficient outdoor factory. Farmers can now easily spend up to 30% of their income on machinery, and this number increases when you consider the buildings and stores they also use to keep their products fresher for longer.
Should you focus on labour or capital when building wealth?
This leads to the personal finance takeaway from this article. At this stage in the UK’s economic development, it pays to have a serious stake in both markets.
Getting a job and receiving a salary is an immediate way to receive financial stability, but prosperity is much more achievable with a combination of labour and capital.
At the point of retirement, after all, a person has expended all of their labour value and will solely survive off their capital (plus government support) for the rest of their lives.
By investing as much of your disposable income as possible into a diversified portfolio of bonds and equities, you are beginning to build your capital value. Growing by an average of 5-6% per year, it may only grow slowly to begin with.
A 5% income yield from a £10,000 portfolio is just £500, which won’t even cover rent for one month. However, by the time your combined pension and other investments are worth £500,000, that same 5% return would equate to £25,000 – a full salary.
The shift of wealth and productivity away from labour and into capital will only continue as labour continues to become more expensive and the possibilities of new technologies accelerate.
Therefore now has never been a better time to begin diversifying yourself away from your employment and into the future of capital, by investing regularly each month.