The ILO’s first global wage report is published to discuss the major trends in the level and distribution of wages around the world. * It also reviews the roles of minimum wages and collective bargaining and explores how to develop a coherence policy in the area of wages. This note summarizes its key findings and policy implications, focusing on the region of Asia and the Pacific.
Overall, despite the positive wage growth in the region, there is an indication that wage growth lagged behind economic and productivity growth. Inequality has also been on the rise, without much progress in gender pay gap. Low coverage of collective bargaining remains a challenge, and the current minimum wage system leaves much room for improvements in many countries in the region. The outlook for 2008-9 is not bright, particularly in the wake of global economic downturn. Tensions on wages are likely to intensify, and the workplace may become more vulnerable to disputes. A coherent policy approach to wages is essential and wage policies need to be complemented by effective income support measures.
Wage trends
Sound economic growth until 2007. Recovering from the financial crisis of the late 1990s, Asia and the Pacific, with a strong influence of China, had been a driving force of globalization and witnessed relatively solid global economic growth until 2007. With this economic achievement, the share of wage employment increased considerably, although the ratio is still below the global average of 46.9 per cent. In East Asia, wage employment was estimated to increase from 32.4 per cent in 1996 to 42.6 per cent in 2006.
Wages grew but tended to lag behind economic growth. This economic growth was accompanied by positive growth in real wages in the region. Between 2001-2007, real wages in Asia and the Pacific were estimated to growth at 2.9 per cent per year, while the estimated global average stand at 3.2 per cent (the global median average was 1.9 per cent). This overall average performance of the region in wage growth needs to be seen in comparison to economic growth. In fact, in Asia and the Pacific, when GDP per capita grew by an extra 1 percentage point, average wages increased by an extra 0.68 per cent. This so-called wage elasticity of 0.68 indicates the possibility that real wage growth lagged behind labour productivity. This estimated elasticity is also lower than the global estimate of 0.75.
Wage share also fell. In line with relatively slow wage growth, there has been a downward trend in the share of GDP distributed to wages, or the wage share. This trend has been observed both industrialized countries (e.g., Japan and the Republic of Korea) and developing countries (e.g., China, the Philippines, and Thailand). Yet this is not unique to the region but commonly found across the regions. Globally, it is found that a 1% annual growth of GDP has been associated with a 0.05% decrease in the wage share.
The trend in wage inequality reversed and increased. Asia and the Pacific had once been praised for equitable growth where sustained growth was successfully combined with lower inequality. However, this is not the case any longer. The Global Wage Report shows that, while the overall share of GDP taken by workers as a whole decreased, the division of this smaller share between individual workers has also become more unequal. Wage inequality increased in most countries in the region for which data are available. The increases were particularly sizable in China, the Republic of Korea, and Thailand. ** Globally, inequality between top wages and bottom wages has increased in more than two thirds of the countries considered in the report.
Gender pay gap has narrowed down, but too little. Globally, the pay gap between genders is still high and closing only very slowly. Although about 80% of the countries for which data are available have seen an increase in the ratio of female to male average wages, the size of change is small and in some cases negligible. In a majority of countries, women’s wages represent on average between 70% and 90% of men’s wages, but it is not uncommon to find much lower ratios (50-60 %) in some parts of the world, particularly in Asia.
Minimum wages and collective bargaining
Collective bargaining on wages remains limited. Collective bargaining coverage in Asia and the Pacific remains very low. The overwhelm majority of countries in the region has coverage rate lower than 15% so that the impact of collective bargaining on wages is very limited. This may explain why wage elasticity for Asia and the Pacific is lower than the global estimate. In fact, the Global Wage Report finds that higher coverage of collective bargaining is associated with higher wage elasticity (or stronger relationship between wage increases and economic growth) and lower wage inequality. For instance, in “high coverage” countries (defined as coverage above 30% of employees), the wage elasticity is estimated at 0.87, while it is much lower at 0.65 for countries with lower coverage.
Minimum wages gained more importance. Partly reflecting the relative weakness of collective bargaining in the region, increasing importance has been attached to minimum wages, especially in the context of sluggish wage growth and widening inequality. Its role in protecting low-paid workers and alleviating poverty is well recognized. Globally, it is estimated that, over the period of 2001-2007, minimum wages in real terms were raised by an average of 5.7 per cent per year. This strong growth is also the case in Asia and the Pacific as a whole, but country variations are quite considerable. Some countries such as China and Viet Nam have witnessed minimum wages (in real terms) growing at higher than 8 per cent per year, whereas minimum wages fell in other countries such as Thailand. In some other cases such as India and Pakistan, minimum wage system has not worked as intended.
However, there are also challenges for minimum wages. Minimum wages have also attracted much debate involving conflicting views. The government and the social partners have been struggling to agree on the level of minimum wages (e.g., Indonesia and Viet Nam), and there are also concerns about the possibility that minimum wages are used as a substitute for collective bargaining (e.g., the Philippines). In other countries such as India, the main concern, particularly for trade unions, has been how to revitalize the allegedly ineffective minimum wage system. The complexity of the minimum wages system which sets up a complicated list of minimum wages for sector, occupation and region, has often proved counterproductive as well. At the same time, a growing body of literature shows that the adverse impact of minimum wages on employment (which is a prevalent concern in Asia and the Pacific) has been exaggerated. Overall, in many countries in the region, the current minimum wage system leaves much room for improvements.
Therefore, coherent policy design is essential. Good practices related to the design of a complementary and coherent set of minimum wages and collective bargaining policies include: 1) keeping the minimum wage simple and opting, whenever possible, for a national minimum wage instead of complex sectoral and/or occupational minimum wages; 2) Trying to ensure that social benefits are, whenever possible, disconnected from the minimum wage level – since this practice often prevents governments from increasing minimum wages for fear of the adverse impact on social security budgets; 3) accompanying minimum wages by credible enforcement mechanisms which involve labour inspectors as well as social partners; and 4) extend the coverage to include vulnerable groups such as domestic workers, who are often excluded from the protection of minimum wage laws. This is particularly important in order to maximise the impact of minimum wages on gender equality at the bottom of the pay ladder.
Outlook
The outlook is not bright. Given the current global economic turmoil which is expected to continue for years to come, the Global Wage Report expects that very difficult times lie ahead for many workers in the region. Based on IMF’s recent downward revision to economic forecasts for 2008-9, it is predicted that, in the region of Asia and the Pacific, the average wage growth in real term is unlikely to exceed 1.8 per cent, with the possibility of wage reduction in countries with low economic growth. This estimate is slightly lower than the global estimate of 2.1 per cent. In addition, higher prices, although being alleviated in recent months, remain a threat to erode real wages, particularly for low-paid workers. Therefore, tensions are likely to intensify over wages, and the workplace may become more vulnerable to wage-related disputes compounded by the pressure of employment reductions.
What can be done? The scale of challenge is huge and there is no easy solution to it. In the short term, governments are encouraged to display a strong commitment towards protecting the purchasing power of their populations. Much of the public debate led by central banks and international financial institutions has so far focused narrowly on keeping wage increases low, with a view to avoiding a wage–price spiral or economic recessions. While this is an important objective, it should be embedded in the broader policy objective of maintaining people’s purchasing power in the face of difficult economic circumstances. Firstly, social partners should be encouraged to negotiate ways to prevent a further deterioration in the share of wages relative to the share of profits in GDP. Interestingly, the recent decline in the wage share also tends to be accompanied by the weakened capacity of translating economic growth into more jobs. Secondly, the levels of minimum wages should be increased wherever possible to protect the most vulnerable workers. Thirdly, minimum wages and wage bargaining should be complemented by public intervention through income support measures, like food subsidy and cash transfer.
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* ILO, Global Wage Report 2008/9: Minimum wages and collective bargaining – Towards policy coherence , Geneva. This note is also drawn from the national studies undertaken for this report (China, Fiji, India, Indonesia, Republic of Korea, the Philippines, Thailand, and Viet Nam). Available at: www.ilo.org/travail as of 25 November 2008.
** See also Lee, S. and Eyraud, F. 2008, “Globalization, institutional reforms, and workers: changes and outcomes” in Globalization, Flexibilization and Working Conditions in Asia and the Pacific (eds by Lee and Eyraud, London: ILO and Chandos Publishing)
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