Wage trends

Are wages around the world converging?

As the world’s emerging economies change the dynamics of the global economy, Philippe Egger, Director of the ILO Bureau of Programming and Management, explores the challenges of comparing wages across countries.

Comment | 18 April 2013
By Philippe Egger, Director of the ILO Bureau of Programming and Management
Unlike several other disciplines, economics is far from being an exact science. It is often hard to find clear answers about basic economic facts and trends.

Take wages, for instance. Half of all employed people rely on wages for a living. These wages tend to reflect the combined efficiency of capital, labour and technology in any given country. So it is important to know whether economies are leading to better wages for the large majority, especially in a highly interconnected global economy.

According to the ILO Global Wage Report 2012/2013, in the last decade, real wages – adjusted to reflect purchasing power – had doubled in Asia, almost tripled in Eastern Europe and Central Asia and increased by 15 per cent in Latin America. That compares with a rise of just five per cent in developed economies. These trends confirmed what we already know about the direction of the current changing regional dynamics, but do they tell us the extent to which wages around the world are converging?

Multiple answers

Answering the question is not straightforward. The prices of goods and services in each country tend to differ as do wages. And comparing them raises a number of difficulties.

Several options are available:

One is to convert nominal wages into a single currency, usually the US dollar, using market exchange rates. This is the least preferable option as exchange rates are subject to many forces other than economic fundamentals. A better option for international comparisons is to work out what it would cost to buy a single basket of goods in each country – the purchasing power parity (PPP).

Comparing countries in this way, results in the following graph, which displays average wages for 2010 in 10 sample countries.

Table 1: Average nominal monthly wages,
in PPP international dollars, 2010

Source: ILO Global Wage Database and IMF

Here we can identify three groups of wage levels of around 700, 1500, and 3,000 international dollars respectively, corresponding to three levels of development or economic efficiency.

A disadvantage of this approach is the difficulty of composing one identical basket of goods that serves all countries.

A variation of this method is to compare wages (again using PPP), in a single occupation, for example unskilled work in construction. A broadly similar picture emerges, with wages of construction labourers in emerging countries 3 to 5 times lower than those in advanced countries. There are, however, interesting differences in the findings of the two graphs when comparing the United States with Germany and Turkey with Portugal.

If the trends in real wages mentioned earlier were to be sustained into the future – a questionable assumption – the wages of construction labourers in Asia and in developed economies would equalize by 2038.

Table 2: Average monthly wage of labourers in construction,
in PPP international dollars, 2010

Source: ILOSTAT database and IMF
(Data for China and Germany are average wages in construction)

Another method is possible, based on the price of a staple food good that is prevalent in each region (rice, pasta, wheat or maize meal), which every household is likely to consume. This overcomes the difficulty of trying to compose one identical basket of goods across several countries.

Table 3 shows the cost of 5 kg of the prevalent staple as a percentage of the average wage. This is the most direct possible formula, as it avoids any exchange rate conversion.

Here the graph shows a different picture: In seven countries, the cost of 5kg of a staple food lies between 0.4 and 0.7 per cent of the average wage. Two countries stand out, Indonesia and South Africa with rather different ratios, suggesting some skewing of the relation between wage levels and average income.

Table 3: Cost of 5 kg of staple food
in per cent of monthly average wage

Source: ILO Global Wage database; FAO GIEWS database; Eurostat;
US Bureau of Labour Statistics; and South Africa Quarterly Food Monitor

More data needed

There has been much public debate about the role of domestic versus international factors in shaping relative wage levels. Some argue globalization is pressuring wages downward, whilst others argue that domestic institutions retain the upper hand in wage setting.

In order to move closer to a possible answer, we need more frequent international comparisons of wages covering more countries and occupations.