The global economic challenge: Slow wage growth

Factory workers Image copyright Reuters
Image caption Why are workers' wages lagging behind productivity?

Economic output and even jobs have recovered to pre-crisis levels in some major economies, but wage growth continues to lag.

The International Labour Organisation (ILO) finds that globally, real wage growth, adjusted for inflation, has not returned to the levels found before the global crisis.

In 2006 and 2007, wages were growing at about 3% on average per month. It slowed considerably to 2% last year. When China's 9% growth in wages is taken out of the data, global wage growth nearly halves to just 1.1%.

This is while global inflation averaged 3.9% in 2013, according to the International Monetary Fund (IMF). In other words, wages were not keeping up with price rises.

Even worse, in some countries - notably the UK, Greece, Ireland, Italy, Japan and Spain - average real wages in 2013 were below what they were in 2007. Across all developed economies, real wages were flat in the past couple of years, up just 0.1-0.2%.

So the global average is being lifted by Asia and eastern Europe where wages have grown at 6%. But there's divergence within emerging markets, something that I've written about before. Wage growth was less than 1% in Latin America and Africa.

Of course, firms pay workers based on their productivity and what they can sell their goods for. So weak demand since the last recession hasn't helped.

But lagging wages was an issue before the banking crisis. The ILO finds that between 1999 and 2013, the productivity of workers exceeded that of wages in Germany, Japan and the United States.

It helps to explain the decline in the share of income going to labour, which is one of the causes of growing inequality, as those who own capital gain a greater share. In the US, labour's share of income is the lowest in the post-World War Two period.

It's also fallen in China. So China's 9% increase in real wages looks impressive, especially compared with other economies. But a declining share means that capital owners are taking home even more.

One consequence that the ILO emphasises is the effect in terms of driving up inequality, as the top 1% who tend to own capital do better than workers.

It estimates that in developed economies, wages represent 70-80% of pre-tax income for working households. It's slightly less in emerging economies, but still very important.

Another consequence is less money for households to spend, which is one of the reasons why there's been weak demand for goods and services.

That's one of the contributors to slow global economic growth, which the IMF's Christine Lagarde described to me as the New Mediocre.

So slow wage growth has been exacerbated by the deep recession and the resultant high unemployment, the latter of which is still felt in the eurozone and other places. But the trend was evident before.

Potential explanations include the shift in developed economies from industries that use more workers to more capital-intensive ones, as low-end manufacturing moved to emerging economies. So technological change, globalisation, and probably other factors have led to weak wage growth.

Getting to the bottom of why wages lag productivity could be key to boosting economic growth.