Global wage growth at lowest level in four years, says ILO

Global growth in real wages has slowed over the last four years, according to the International Labour Organization, potentially adding to deflationary pressures.

by Kanaga Raja

GENEVA: Global real wage growth has decelerated since 2012, falling from 2.5% to 1.7% in 2015, its lowest level in four years, the International Labour Organization (ILO) has said.

In its Global Wage Report 2016/17, released on 15 December, the ILO said if China, where wage growth was faster than elsewhere, is not included, real wage growth has fallen from 1.6% in 2012 to 0.9% in 2015.

“The United Nations 2030 Agenda for Sustainable Development identified decent work for all women and men, and lower inequality, as among the key objectives of a new universal policy agenda. The issues of wage growth and wage inequality are central to this agenda,” said ILO Director-General Guy Ryder in a preface to the report.

According to the ILO chief, trends show that global real wage growth dropped sharply during the post-2008 economic crisis, recovered in 2010, but has since decelerated.

“As I emphasized at the World Bank and IMF annual meetings in October 2016, rekindling growth requires an increase in consumer spending and in turn sustainable wage and social protection policies. Improving wages and decent work opportunities will be essential to breaking out of the slow-growth trap in which the global economy currently finds itself,” he said.

According to the ILO, during most of the post-crisis period global wage growth was driven to a large degree by relatively strong wage growth in emerging and developing countries in Asia and the Pacific, most notably in China, as well as in some other developing countries and regions. More recently, this trend has slowed or reversed.

“In an economic context in which lower demand leads to lower prices (or deflation), falling wages could be the source of great concern, as it could add further pressure to deflation,” said Deborah Gree nfield, ILO Deputy Director-General for Policy, in an ILO news release.

According to the report, among emerging and developing countries in the G20 grouping of major economies, real wage growth fell from 6.6% in 2012 to 2.5% in 2015.

In terms of regional wage growth, the report found that in 2015 real wage growth remained at a relatively robust 4.0% in Asia, declined to 3.4% in Central and Western Asia, and was tentatively estimated at 2.1% in the Arab States and at 2.0% in Africa.

In 2015, real wages dropped by 1.3% in Latin America and the Caribbean (mostly due to falling wages in Brazil), and by 5.2% in Eastern Europe (mostly due to falling wages in the Russian Federation and Ukraine).

In contrast, said the report, wage growth increased in the developed countries.

Among developed G20 countries, real wage growth went from 0.2% in 2012 to 1.7% in 2015, the highest rate of the last 10 years.

In 2015, real wage growth rose to 2.2% in the United States, 1.5% in Northern, Southern and Western Europe, and 1.9% in the countries of the European Union (EU).

Faster wage growth in the United States and Germany explains an important part of these trends, the ILO said. “It is as yet unclear whether such wage growth will be sustained into the future or whether developed countries will return to their previous pattern of wage stagnation.”

In an economic context in which risks of deflation have increased in many countries, falling wages could themselves become an important risk factor, potentially leading to deflationary wage-price spirals, the report cautioned.

Globally, the recovery in Northern America and some European countries was not sufficient to offset the decline in emerging and developing economies.

“The lower differential in wage growth between developed and developing countries also implies a slowdown in the process of wage convergence between the two groups of countries,” the ILO said.

Fall in labour share of income

According to the report, trends in real wages are influenced by economic factors such as gross domestic product (GDP) growth and price inflation, but other factors also come into play.

There is now a large body of literature showing that in a majority of countries across the world, wage growth in recent decades has lagged behind the growth of labour productivity, leading to a fall in the labour share of GDP.

This is likely due to a combination of factors including globalization, skills-biased technology, the weakening of labour market institutions, and the growing pressure from financial markets to shift surpluses generated by large businesses towards investors.

In this context, the report found that after some expected counter-cyclical upward movement in the labour share in many countries during the years 2007-10, the labour share has resumed its long-term decline in a small majority of countries during 2010-15. Exceptions include China, Germany and the United States, but even in these countries the labour shares remain far below their peak levels.

Wage inequality

The report also found that in most countries wages climb gradually across most of the wage distribution and then jump sharply for the top 10% and, especially, for the highest-paid 1% of employees.

In Europe, the highest-paid 10% receive on average 25.5% of the total wages paid to all employees in their respective countries, which is almost as much as what the lowest-paid 50% earn (29.1%).

Although the data are not strictly comparable, the share of the top 10% is even higher in some emerging economies, for example, Brazil (35%), India (42.7%) and South Africa (49.2%). In South Africa and India, the lowest-paid 50% receive, respectively, just 11.9% and 17.1% of all wages paid out.

According to the ILO report, wages and wage inequality are not determined only by the skills-related characteristics of individuals (such as level of education, age or tenure) but a host of other factors also play crucial roles. These include, for example, gender, enterprise size, type of contract and the sectors in which workers work.

In Europe, for example, women make up on average 50-60% of workers in the three lowest pay deciles; this share falls to about 35% among the best-paid 10% of employees, and further to 20% among the highest-paid 1% of employees. In some emerging and developing countries, the contrast is even greater, said the report.

“Recent literature shows that increasing inequality between enterprises (as measured by differences in average wages among enterprises) has played an important part in the increase in US wage inequality between 1981 and 2013, as well as in the fall in Brazilian wage inequality between 1996 and 2012.”

In the United States, said the ILO, the higher inequality between enterprises has been mainly attributed to growing polarization, with high-skilled workers clustering in some enterprises and low-skilled workers clustering in others, consistent with the trend towards restructuring and outsourcing peripheral activities to sub-contractors or franchisees. In Brazil, a large share of the decline in inequality between enterprises has been attributed to a higher minimum wage.

According to the report, inequality between enterprises tends to be greater in developing than in developed countries. While in developed countries the average wages in the top 10% of enterprises tend to be two to five times as high as those in the bottom 10%, this ratio goes up to eight in Vietnam and even 12 in South Africa.

Norway has a high proportion of enterprises which pay middle-of-the-range average wages, compared to the United Kingdom, which has a higher proportion of enterprises with either low or high average wages.

“On average, in 22 European countries, inequality within enterprises accounts for 42% of total wage inequality, while the rest is due to inequality between enterprises,” said ILO economist Rosalia Vazquez-Alvarez in the ILO news release.

Ranking enterprises by their average wages and looking at the minimum and maximum wages they pay, the report found that in Europe there is considerable wage inequality, particularly within enterprises that register relatively high average wages.

When comparing the wages of individuals with the average wage of the enterprises in which they work, most people (about 80%) are paid less than that average wage, said the ILO. At the very low end of the curve, some workers earn wages far below the average wages of the enterprises in which they work, pointing towards large inequality within such enterprises as a cause of unduly low pay. At the very top end of the curve, the top 0.1% of individuals are paid €211 per hour, while the enterprises in which they work pay on average €45 per hour.

According to the ILO, in the 1% of enterprises with the highest average wages, the bottom 1% of workers are paid on average €7.1 per hour, while the top 1% are paid on average €844 per hour.

“The extent of wage inequality within enterprises – and its contribution to total wage inequality – is quite large, which indicates the importance of enterprise-level wage policies in reducing overall inequality,” said Greenfield.

The report also found that while the overall hourly gender pay gap for Europe is about 20%, among the top 1% of wage earners it reaches about 45%. Among CEOs, who are among the best-paid 1% of wage earners, the gender pay gap is above 50%.

The report recommends some possible country-specific policy measures such as minimum wages and collective bargaining, self-regulation or more regulation by enterprises of top salaries to keep wage inequality within socially acceptable bounds, promoting productivity growth among sustainable enterprises, and addressing unequal wages between groups of workers, including women and men.

Other measures include fiscal policies, in the form of taxes and transfers, to address wages and inequality, and policies that affect wages and wage distribution indirectly such as access to quality education, ongoing programmes to improve the skills of the workforce, and better matching between job-seekers and jobs. (SUNS8379)                      

Third World Economics, Issue No. 630, 1-15 December 2016, pp2-3