TWN Info Service on UN Sustainable Development (Dec22/02)
8 December 2022
Third World Network

Labour: Rising inflation causing a sharp fall in real wages, says ILO
Published in SUNS #9703 dated 5 December 2022

Geneva, 2 Dec (Kanaga Raja) — Rising inflation combined with a slowdown in global economic growth is causing real wage growth to dip into negative figures in many countries, reducing the purchasing power of the middle class and hitting low-income groups particularly hard, the International Labour Organization (ILO) has said.

In its Global Wage Report 2022-2023, the ILO estimates that global monthly wages fell in real terms to -0.9 per cent in the first half of 2022 – the first time this century that real global wage growth has been negative.

If China, where wage growth is higher than in most other countries, is excluded from the computations, the fall in real wages during the same period is estimated at -1.4 per cent, it said.

Among the G20 countries, which account for some 60 per cent of the world’s wage employees, real wages in the first half of 2022 are estimated to have declined to -2.2 per cent in advanced economies, while wage growth in emerging economies slowed but remained positive at 0.8 per cent, said the report.

This clearly indicates that nominal wages in many countries have not been adjusted sufficiently in the first half of 2022 to offset the rise in the cost of living, said the ILO.

“The multiple global crises we are facing have led to a decline in real wages. It has placed tens of millions of workers in a dire situation as they face increasing uncertainties,” said ILO Director- General Gilbert F. Houngbo.

“Income inequality and poverty will rise if the purchasing power of the lowest paid is not maintained. In addition, a much-needed post-pandemic recovery could be put at risk. This could fuel further social unrest across the world and undermine the goal of achieving prosperity and peace for all,” he added.

GLOBAL ECONOMIC CONTEXT

According to the ILO report, after the collapse of global economic growth in 2020 owing to the measures taken worldwide to control the spread of COVID-19, global output rose strongly during 2021 in both advanced and emerging economies.

It said this was the strongest post-recession jump in growth in 80 years and may be explained by a rapid rebound in aggregate demand as many countries started to gradually relax the pandemic-related measures in the course of 2021.

Thus, by the end of 2021, global economic growth had increased by 6.1 per cent, with economic growth increasing by 5.2 per cent among advanced economies and by 6.6 per cent among emerging market and developing economies.

The ILO said that one critical factor behind this remarkable growth recovery has been the progress in vaccination against COVID-19.

It said by early October 2021, the share of fully vaccinated people worldwide had reached about 35 per cent, and as vaccination rates started to increase in countries where vaccines were swiftly rolled out, there followed a gradual relaxation of lockdown measures and a decline in workplace closures.

However, the report said that vaccine access and coverage remain unevenly distributed across the world.

According to the latest WHO (World Health Organization) estimates, more than 74 per cent of people were fully vaccinated in high- and upper-middle-income countries, compared with 57 and 19 per cent in lower-middle- and low-income countries, respectively, it added.

“Unfortunately, most emerging economies and almost all low-income countries did not have the fiscal capacity to launch the stimulus packages required to mitigate the socio-economic effects of the COVID-19 crisis and kick-start their economic recovery,” it said.

“The IMF estimates that, out of the US$17 trillion spent globally on such packages up to the end of 2021, only about 0.4 per cent can be attributed to developing countries, while advanced and emerging market economies accounted for, respectively, 86 per cent and 14 per cent of the total.”

This clearly points to a “fiscal stimulus gap” that is likely to cause advanced and emerging economies to follow diverging paths in the recovery process, said the ILO.

The war in Ukraine since February 2022 and other growing crises of a regional nature or with a global dimension (such as the cost-of-living crisis) have dampened expectations of progress in the post-COVID-19 recovery, the ILO added.

Accordingly, IMF projections suggest that the global economy will grow by 3.2 per cent in 2022, down from the 3.6 per cent forecast in April 2022, and by between 2 and 2.7 per cent in 2023, it said.

“In advanced economies, the unprecedentedly massive public spending during the COVID-19 crisis has led to a significant increase in government debt.”

The report said debt among these countries increased from 103 per cent of real GDP before the pandemic (2019) to 121 per cent in 2020, a ratio that seems to have stabilized at around 119 per cent after 2021.

In contrast, debt in emerging market and developing economies increased less steeply, from 57.6 to 67.4 per cent of real GDP over the same period.

Following the outbreak of war in Ukraine, the fiscal outlook is increasingly uncertain, particularly for countries in Europe, said the report.

It said according to the IMF (International Monetary Fund), in a positive geopolitical scenario involving a quick end to the war, debt in advanced economies would fall to about 113 per cent of GDP by 2024.

The ILO report noted that advanced economies have far more fiscal leeway than emerging market and developing economies, where debt is also expected to decline but there is greater uncertainty owing to a weak recovery, limited fiscal space, and volatile commodity prices.

Across all regions of the world, the war in Ukraine has accelerated the increase in prices, which were already rising markedly in the course of 2021, said the report, adding that this has alarming implications for wages, since rising inflation is likely to erode their real value unless nominal wages keep up with price levels.

Significantly, the report said the October IMF projections for 2022 are 0.8 percentage points and 0.9 percentage points higher for the advanced and developing economies, respectively, than the projections originally published in April 2022.

Inflation is currently one of the major concerns of policymakers at the national and multilateral levels, it noted.

“As suggested by the available data, consumer prices had been on the rise throughout 2021 and have continued to increase even faster since the start of 2022.”

The report said that inflation among advanced economies rose by 2.4 percentage points year on year over the period 2020-21, whereas over the period 2021-22, it is expected to increase by a further 4.1 percentage points.

It said that among emerging market and developing economies, the increase over the period 2021-22 is expected to be 4.0 percentage points, with inflation reaching 9.9 per cent by the end of 2022.

During 2023, it is expected that inflation will drop considerably in both groups, it added.

The report said that the recent surge in inflation is often ascribed to the supply bottlenecks resulting from COVID- 19-related restrictions, but analysts are also citing additional factors.

It said in particular, it has been suggested that inflation was inevitable because of the stimulus packages adopted to overcome the COVID-19 crisis coupled with the loose monetary policy of central banks over the past few years.

“The war in Ukraine has compounded the influence of these earlier developments to push inflation even higher. It has also been pointed out that some large corporations may have taken advantage of the inflationary environment to raise their prices and profits.”

The items in the basket of goods and services that are most likely to experience large price increases are those with an inelastic demand, such as food, housing, transport and energy, said the report.

For example, annual inflation in the eurozone was expected to reach 8.1 per cent by May 2022, driven largely by a 39 per cent increase in energy and food prices, it added.

LABOUR MARKET CONTEXT

The lockdown measures imposed during 2020 and 2021 to contain the spread of the coronavirus plunged labour markets around the world into an unprecedented crisis, said the report.

It said from the second quarter of 2020, there was massive destruction of employment and economic activity, which affected both women and men but reduced the global employment of women by 1.2 percentage points more than for men.

“The crisis also resulted in a significantly smaller share of lower-paid workers in the labour force in 2020 than in 2019, as low-wage earners suffered disproportionately in terms of employment and working-hour losses.”

This contributed to an increase in income inequality, possibly reversing the decline in inequality observed in some emerging and low-income countries in the years before the COVID-19 pandemic, said the report.

“At the same time, the crisis has expedited the adoption of novel modalities of work, including telework, that would otherwise have taken much longer to gain traction.”

For example, the report said, approximately 34 per cent of all employees in the EU countries started teleworking during 2020.

In Latin America and the Caribbean, it is estimated that around 23 million workers embraced teleworking during 2020-21, which is approximately 23 per cent of the 98 million wage employees in the region.

“The full impact of COVID-19 on the use of telework in the future remains to be seen. However, it is likely that teleworking rates will remain significantly higher than they were previously,” said the report.

It said post-pandemic telework is expected to follow a hybrid pattern, with people working part of the time in an employer-provided workplace and part of the time remotely.

“Another important policy measure adopted to counteract the economic and labour market effects of the crisis was the use of public funds to support the wages of workers in enterprises directly affected by the pandemic so that they could continue in employment,” it added.

It said by the end of 2021, as lockdown measures were lifted, employment had returned to pre-crisis levels or even surpassed them in most high-income countries, but employment deficits persisted in some middle-income countries.

Although data for all of 2022 are not yet available, estimates for the first quarter suggest that global working hours remain about 3.8 per cent below the level of the last quarter of 2019, it added.

Across country income groups, low-income countries are lagging behind in the first quarter of 2022, with 5.7 per cent fewer hours worked compared with the last quarter of 2019, while high-income countries have recovered the most, with 2.1 per cent fewer hours worked in the first quarter of 2022 compared with the last quarter of 2019, said the report.

Estimates also show that certain groups in the labour market suffered more severely than others, particularly during the period leading up to the end of 2020. These include low-wage workers, workers in the informal economy, wage workers in temporary employment, women and young workers, it added.

“The further recovery of global, regional and national labour markets depends very much on the socioeconomic impact of the ongoing crises – particularly the cost-of-living crisis, but also geopolitical turmoil, driven mainly by the war in Ukraine,” said the report.

Current geopolitical tensions, together with the rising cost of living, could in fact cause the recovery in employment levels to deviate from the trajectory that had been projected for the end of 2022, it added.

It said that this will certainly be the case if the war in Ukraine does not end before long. In such circumstances, the war’s impact on energy prices and further bottlenecks in the supply of goods needed for production will continue to slow down global growth during 2022.

“With only a few exceptions (such as oil- and gas-exporting countries), employment and economic output in most countries are likely to remain below pre-pandemic levels till the end of 2026,” the ILO cautioned.

WAGE TRENDS

According to ILO estimates, although the COVID-19 crisis destroyed many wage and salaried jobs during the first full year of the pandemic, with global wage employment dropping from 1.75 billion in 2019 to 1.69 billion in 2020, the number of wage and salaried workers had almost recovered to pre-pandemic levels by the end of 2021, reaching 1.74 billion, or 53 per cent of global employment.

The remaining 47 per cent are employers, own-account workers (that is, independent workers without employees) and contributing family workers, many of whom operate in the informal economy.

Applying a longer-term perspective, ILO estimates indicate that wage and salaried employment rose by 36 per cent between 2005 and 2021, compared with a 16 per cent increase in total global employment over the same period.

The increase in wage employment, which was especially pronounced in low- and middle-income countries, shows that this form of employment continues to gain ground and is becoming an increasingly important factor in shaping households’ income and, therefore, income inequality, said the report.

It is for this reason that the regular and rigorous analysis of global and regional wage trends should be considered a key empirical tool by policymakers around the world, it added.

The report estimates that global monthly wages fell in real terms to -0.9 per cent in the first half of 2022 – the first negative global wage growth recorded since the first edition of the Global Wage Report in 2008.

If China, where wage growth is typically higher than the global average, is excluded from the computations, global real wage growth during the first half of 2022 is estimated to fall to -1.4 per cent.

In view of these developments, a cost-of-living crisis could well dominate wage trends until the end of 2023, said the ILO.

Another significant finding is that global wage growth slowed down from 2.0 per cent in 2019 to 1.5 per cent in 2020, the first year of the pandemic, it added. It said this decrease, which seems surprisingly modest, may be explained by the restrictions implemented in 2020 to contain the coronavirus, which led to a reduction in the number of hours worked and to frozen or reduced nominal wages in many places.

“However, the pandemic’s relatively limited impact on average wages – and indeed the fact that global wage growth was positive at all in 2020 – may largely be ascribed to a change in the composition of employment, particularly in some big countries.”

In 2021, global wage growth rebounded and was estimated at 1.8 per cent, which is quite close to the estimate for 2019, the year immediately before the pandemic.

However, when China is excluded from the global computation, real wage growth in 2021 was estimated at 0.9 per cent, that is, 0.5 percentage points less than in 2019, said the ILO.

“This comparatively lower growth rate may to some extent reflect the fact that during 2021 the average number of hours worked by employees had not yet fully recovered to pre-pandemic levels.”

In addition, though, the lower rate in 2021 is also likely to be a consequence of inflation having already started to erode real wage growth during that year, the report said.

This trend has gained momentum since then, causing global real wage growth to plummet into negative numbers in 2022, it added.

The report said that rising inflation can have a greater cost-of-living impact on lower-income households.

“This is because such households spend most of their disposable income on essential goods and services, which generally experience greater price increases than non-essential items.”

In Mexico, for example, households in the bottom decile (the lowest 10 per cent) of the income distribution spend 42 per cent of their income on food, whereas those in the top decile spend only 14 per cent on food.

The report said that a comparison of the evolution of the prices of different groups of items with that of the general consumer price index (CPI) for about 100 countries from all the regional groups indicates that the prices of food, housing and transport have all increased more rapidly than the general CPI.

The ILO report said that by estimating the change in the cost of living between 2021 and 2022 at each decile of the household income distribution, it found that the increase in the cost of living among low-income households can be between 1 and 4 percentage points higher than that faced by high-income ones.

According to the ILO, this means that even if wages were adjusted to compensate for the increase in the average cost of living as measured by the CPI, low-income households would still suffer in many countries from an erosion in the purchasing power of workers’ wages.

Minimum wages are a widely used instrument around the world to protect the incomes and the purchasing power of low-paid workers and their families, the report noted.

However, it said, owing to the effect of accelerating price inflation, minimum wages have decreased in real terms in various countries – even when measured against the average CPI.

For example, during 2020-22, the minimum wage decreased in real terms owing to rising inflation in Bulgaria, the Republic of Korea, Spain, Sri Lanka, the United Kingdom and the United States.

These trends reflect the way in which the cost-of-living crisis has hit low-paid workers particularly hard, the ILO said.

REGIONAL WAGE TRENDS

Highlighting some regional trends, the ILO said consistently across regions, one can observe a decline in estimated real wage growth during the first half of 2022 due to the acceleration of price inflation.

In Northern America (Canada and the United States), real wage growth fluctuated between 0 and 1 per cent in most years between 2006 and 2019, including the years immediately before the outbreak of the pandemic.

“In 2020, as the pandemic destroyed the jobs of millions of low-wage workers, the composition effect manifested itself clearly, with average real wage growth suddenly rising to 4.3 per cent.”

The subsequent decline in real wage growth, first to 0 per cent in 2021 and then to -3.2 per cent in the first half of 2022, is due to the composition effect fading away after 2020 (that is, from the moment that low-paid workers returned to the labour market) and the rise in inflation which eroded real wages in 2021 and especially in the first months of 2022, said the report.

In Latin America and the Caribbean, the composition effect – reflecting the fall in low-wage employment during the pandemic – was clearly observable, with real wage growth jumping to 3.3 per cent in 2020, a much higher increase than in any of the pre-pandemic years, when real wage growth fluctuated at very low rates.

In 2021, the collapse in real wage growth to -1.4 per cent was driven largely by a sharp decline in real wages in Brazil, estimated at -7.0 per cent in 2021, said the ILO.

It said although real wages in Brazil increased somewhat during the first half of 2022, they declined on average across the region as inflation started to make itself felt. The data for Chile, for example, show that real wages have been trending modestly downwards since January 2022.

In the European Union, real wage growth fluctuated between approximately 1 and 2 per cent before the outbreak of the pandemic.

The ILO said in 2020, real wages froze – but did not decline on aggregate – most likely as a result of a combination of forces pulling in different directions, including: (a) declining wages for some workers; (b) the massive use of temporary wage subsidies to maintain the wages of millions of workers, even though their hours of work declined; and (c) composition effects pushing average wages up, since even moderate employment losses disproportionately affected low-paid workers.

After a temporary recovery of wage growth in 2021, real wages fell to -2.4 per cent in the first half of 2022 (to -2.2 per cent if the United Kingdom is included) as inflation cut into the value of wages, said the report.

In Eastern Europe, it said that real wages increased relatively fast before the pandemic, growing at rates above 5 per cent between 2017 and 2019, and even above 8 per cent during 2018.

“The outbreak of the pandemic slowed down real wage growth to 4.0 per cent in 2020 and 3.3 per cent in 2021, whereas in the first six months of 2022 accelerating price inflation caused real wage growth to decline to -3.3 per cent.”

The report said in Asia and the Pacific, the impact of high wage growth in China before the pandemic is significant, with real wage growth in the three years before the pandemic ranging from 3.0 to 3.3 per cent in the region when China is included, and reaching even higher rates in some of the earlier years.

However, when China is excluded, regional wage growth in the three years before the pandemic drops to 1.5 per cent or less.

In 2020, wage growth in the region falls to 1 per cent, and even turns negative when China is excluded. After a recovery in 2021, wage growth declined again but remained positive at 1.3 per cent as inflation began to rise in 2022, said the report.

In Central and Western Asia, real wages grew at a relatively fast pace in the two years before the pandemic, as well as more generally between 2006 and 2019.

It said that in 2020, the first year of the pandemic, real wages fell to -1.6 per cent before rebounding very strongly in 2021. Estimates for 2022 show that in this region, too, real wage growth is being eroded by rising inflation.

In Africa, wage statistics remain patchy in many countries and sometimes display surprisingly large fluctuations, it said, adding that regional estimates are therefore merely tentative.

“The available data suggest slow real wage growth (if any) in the years before the pandemic, a sharp fall in real wage growth of -10.5 per cent in 2020 and thereafter real wage growth of -1.4 per cent in 2021 and -0.5 per cent in the first half of 2022.”

In the Arab States, wage statistics likewise remain patchy and their coverage is limited. Regional wage growth estimates are thus tentative at best, said the report.

The scanty available data suggest low positive wage growth of 0.8 per cent in 2020, 0.5 per cent in 2021 and 1.2 per cent in 2022, it added +