Downward to Stagnation: Wage policies in times of crisis

Janine Berg

The Triple Crisis Blog is pleased to welcome Janine Berg, Senior Labour Economist at the International Labour Office in Brasilia, Brazil, as a regular contributor.

Not surprisingly wages have fallen during the economic crisis. A new report produced by the ILO, Wage Policies in Times of Crisis, provides evidence on the decline in wage growth during the crisis, and highlights the particularly severe reductions that have occurred in industrialized countries.

The world’s salaried employees suffered a decline in real wage growth from 2.2 percent in 2007 to 0.8 percent in 2008 and 0.7 percent in 2009 (excluding China, due to difficulties with the data). Real wages fell in 12 of 28 industrialized countries in 2008, including Australia (-0.9%), Germany (-0.4%), Italy (-0.7%), Japan (1.9%), Mexico (-2.6%), S. Korea (-1.5%) and the U.S (-1.0%).  And although some countries recovered in 2009 (in some cases due to the fall in inflation), real wage growth continued to be negative in Germany (-0.4%), Mexico (-5.0%), Japan (-1.9%), and S. Korea (-3.3%), whilst France (-0.8%), the U.K (-0.5%), and Russia (-3.5%), also entered into negative territory.  Moreover, these figures likely over-represent real wage growth, as job losses have been more concentrated on low-wage workers, who by no longer working are no longer considered in the sample. By 2009, the ranks of the unemployed had reached 210 million, a global unemployment rate of 6.4 percent.

Besides showing recent trends in wages for the world’s 1.4 billion salaried workers, the report also provides information on wage growth during the 2000s and shows how there was a decoupling of wage growth and productivity growth in most countries of the world, but particularly the industrialized countries. In the US, for example, between 2000 and 2009, labour productivity grew by 13 percent, whereas real average wages grew by only 2.2 percent.  In Korea, real wage growth was much stronger – at 18.3 percent during the 2000-2009 period – but still well below the growth in labour productivity of 27.4 percent.

The report argues that this decoupling contributed to the crisis, since the decline in wages, especially among low and middle-income households, was compensated in some cases by an increase in debt in order to maintain standards of living.  Aggregate demand was propped up in the short term under this model, but could not be sustained.  Other countries, especially in Asia, compensated for the weak internal demand by relying on exports. Thus, a principal conclusion is that a recovery will only be sustainable if gains in productivity growth are shared with workers.

Interestingly the report showed that countries with collective bargaining coverage that surpasses thirty percent of the labour force did not exhibit such a pronounced decoupling of wages from productivity growth.  For these countries, a one percent increase in GDP during 1995-2007, resulted in a 0.87 percent increase in wages, whereas for countries with weak coverage, the resulting wage growth was just 0.65 percent.

Minimum wages are important for ensuring wage growth at the bottom of the pyramid and their effect can be far-reaching, as they exist in 90 percent of countries in the world.  In contrast with past crises, many countries increased their minimum wages during this crisis, though typically at a level matching the rate in inflation. Ireland, of course is an exception, with its recent decision to cut its minimum by one euro as part of its 2011 budget. Brazil, on the other side of spectrum, maintained its previously negotiated decision to increase the minimum by 12 percent nominally in February 2009, far exceeding the 5.9 percent level of inflation. In all, some 20 percent of the population benefited from the increase, providing an important stimulus to domestic demand.

Other important policies that can increase the incomes of workers on the low-end of the wage pyramid are tax credits such as the Earned Income Tax Credit of the U.S. or the Prime pour l’emploi in France, or broad income transfers such as Brazil’s Bolsa Família or South Africa’s Child Support Grant.

Yet with policymakers more focused on deficit cutting then fiscal stimulus and with labour movements weakened by globalization, it seems unlikely that wage policies will get the boost they need for the world to recover from this current crisis.