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Wage moderation is holding back economic growth, says ILO
The global financial and economic crisis which erupted three year ago in the wake of the collapse of Lehman Brothers has provoked much debate on how flexible wage levels need to be in order to support economic recovery. At a recent European Commission conference, the International Institute for Labour Studies (ILO) presented a fascinating paper examining the links between wage developments and employment recovery prospects.
The event, held on 15 September 2011 in Brussels, brought together academics, researchers, employment policy makers, representatives of the ILO and OECD and social partners to debate the issue of wage developments in Europe and their impact on competitiveness and social cohesion.
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Role of wage moderation
The received wisdom in many countries is that lower wages are a key counterpart to fiscal austerity packages. Put simply, by enhancing profitability and competitiveness, lower wages serve to enhance job creation and economic growth. But some economists have severe misgivings and warn that the “negative demand effects” of lower wages will prevail.
Wage trends
According to the data gathered by the ILO, the global crisis was preceded by a prolonged period of wage moderation. An analysis of over 70 countries during the 20 years prior to the crisis reveals that the “wage share” - i.e. labour’s share of national income/GDP – had fallen in three-quarters of the countries, with the fall particularly acute since 2000.
In some advanced economies such as the United States, the United Kingdom, Spain and Ireland, wage moderation caused a build-up of private debt. The report says: “Despite stagnant real incomes, households could purchase durable goods and housing through recourse to bank credit. Reflecting inadequate regulations, banks were in a position to provide credit to these households – even though, under prudent criteria, such loans would not have been provided. Thus, the expansion in domestic demand in the US and some other advanced economies was funded from an accumulation of private debt.”
Moreover, since 2008, wage growth has decelerated sharply in advanced countries and some emerging economies. Wage moderation has been especially strong for the lowest earners. The paper says: “This was mainly a result of the pressure put by labour market slack and the high and persistent unemployment that resulted from the crisis.”
As the paper explains: “To some extent, wage moderation was fuelled by the expectation that it would boost profits, thus making room for higher productive investment. The evidence suggests that this expectation materialised only partially: while profits shares increased – mainly in the years that preceded the crisis – investment growth was more moderated – especially in advanced economies.”
According to the ILO, during the recent global crisis wage moderation in both developed and emerging economies, has served to dampen economic growth by reducing consumer demand.
A final word
“A growing number of analysts are therefore increasingly turning towards wages and their role of wages in rebalancing economic growth, by sustaining aggregate demand and labour productivity. Recent evidence shows that a wage-led growth model (i.e. a model where wage growth leads to higher demand, leading in turn to higher productivity, higher investments, and hence to higher economic growth) appears to be more sustainable in the long run, as it increases the productive capacity of the economy.” - International Institute for Labour.
Want to know more?
Title: “Wages and the global crisis: evidence and policy issues”, paper by the International Institute for Labour Studies, ILO, for the Conference on Wage Trends in Europe, Brussels, 15 September 2011.
Availability: For more details about the European Commission conference click here.
The ILO is the international organisation responsible for drawing up and overseeing international labour standards. It is the only “tripartite” United Nations agency that “brings together representatives of governments, employers and workers to jointly shape policies and programmes promoting Decent Work for all”. For more information visit www.ilo.org.