Wage growth stalls in developed economies

The latest Global Wage Report by the International Labor Organization warns of stalled wages in many countries and notes that the labor market is a driver of inequality. 

Worldwide wage growth slowed in 2013 and has not yet reached pre-crisis rates. During the crisis in 2008 and 2009, real wages dropped sharply on a global level. They only recovered somewhat in 2010 before decelerating again.  

In 2013, average monthly real wages increased 2 percent globally, down from 2.2 percent in 2012 and about 3 percent in 2006 and 2007. 

Almost all of the wage growth in recent years, however, has come from emerging and developing economies, especially in Asia and Eastern Europe. In fact, if China is excluded, global wage growth is almost cut in half at just 1.1 percent. 

Kristen Sobeck, economist at the ILO and one of the authors of the report, said that “the last decade shows a slow convergence of average wages in emerging and developing countries towards those of developed economies, but wages in developed economies remain on average about three times higher than in the group of emerging and developing economies.”  

Wages in developed countries remained flat in 2012 and 2013, growing by only 0.1 percent and 0.2 percent, respectively. 

In countries such as Greece, Ireland, Italy, Japan, Spain and the United Kingdom, average real wages have not recovered from the decline during the crisis and are still below their 2007 levels.  

“Wage growth has slowed to almost zero for the developed economies as a group in the last two years, with actual declines in wages in some,” said Sandra Polaski, the ILO’s deputy director-general for policy. “This has weighed on overall economic performance, leading to sluggish household demand in most of these economies and the increasing risk of deflation in the Eurozone.”  

Overall wage growth has lagged behind growth of labor productivity – the value of goods and services produced per person employed – in developed countries since 1999. This was only briefly interrupted by the financial crisis. The gap remains when labor productivity growth is compared to average compensation growth which includes social insurance contributions. 

In Germany, Japan and the United States, labor productivity growth exceeded wage growth between 1999 and 2013. As a result, the share of labor income in the economy has declined in all three countries. In other words, workers and their households are getting a smaller share of economic growth, while the owners of capital are benefitting more. In the economy stagnant wages have also contributed to weak aggregate demand. 

However, this development has prompted a policy response in these countries. Germany adopted a new minimum wage which will come into effect in 2015, while Japan has encouraged its companies to increase pay to stimulate domestic consumption.  

These initiatives reflect recommendations by the International Monetary Fund, which also called for an increase in the minimum wage in the United States and an expansion of the earned income tax credit to reduce poverty and support aggregate demand. 

In the U.K., in turn, wage moderation was considered necessary by the Bank of England to improve competitiveness and fight unemployment during the crisis.  


The policy challenge  

However, the ILO believes that if many countries attempt to boost exports by repressing wages or reducing social benefits, the consequences could feed into a serious contraction of output and trade.  

“Wage stagnation must be addressed as a matter of fairness and of economic growth,” said Polaski. “And because overall inequality is driven significantly by wage inequality, labor market policies are needed to address it.”  

While fiscal redistribution mechanisms, including taxes and social protection policies are also part of the solution, they cannot bear the full burden of addressing inequality, she added.  

A comprehensive strategy should include minimum wage policies, strengthened collective bargaining, elimination of discrimination against vulnerable groups, as well as progressive taxation polices and adequate social protection systems, she recommends.  

“Better support for firms in the real economy, especially small and medium enterprises, is also needed to allow them to grow and create jobs. Many countries can do more to make credit available to them and to streamline business creation,” said Polaski.  

Ultimately, moving people into paid employment with decent wages should be at the heart of strategies to reduce inequality, observers say.  

Coordinated strategies are also needed at the international level, the report says.