When it comes wage increases, too many people are losing out

Wages can tell you more about your economic well-being and expectations for a better life than other indicators for the economy.

By some measures, the global economy seems to be doing very well.

The ILO’s “World Employment Social Outlook: Trends 2018” stated that global economic growth increased to 3.6 per cent in 2017, after hitting a six-year low of 3.2 per cent in 2016. The recovery was broad based, driven by expansions in developing, emerging and developed countries alike.

For the U.S., unemployment is currently at its lowest point for nearly two decades with a 3.9 % unemployment rate, the stock market is at record highs and the private-sector has added jobs to the labor market for 101 straight months.

However, the global economic picture moving forward, which will directly impact on national economies, is a bit more nuanced.

The ILO Director-General Guy Ryder said that “even though global unemployment has stabilized, decent work deficits remain widespread: the global economy is still not creating enough jobs. Additional efforts need to be put in place to improve the quality of work for jobholders and to ensure that the gains of growth are shared equitably”.

For most people, wages represent a vital source of household income and have a huge influence on people’s living standards. For the middle-class in developed countries, the share of wages in total income is frequently above 80 %, whereas for low-income households social programs play a more important role in complementing incomes from wages.

Despite a labor market that looks to be at full employment which normally puts upward pressure on wages, U.S. workers wages are not going up. In fact, when adjusted for inflation, wages are stagnant.

While nominal wages are up 2.7 percent above the average wage from a year earlier, the average American is hardly feeling the increase, because the cost of living is also on the rise. If someone’s annual pay increases $2,400 but the rent goes up $200 a month, the worker can only maintain the same living standard.

Wage stagnation is driven by numerous factors, including the growing number of low-paid jobs, the remaining slack in the labor market as measured not only by the unemployment rate but also by the number of discouraged and involuntary part-time workers, the pressure of financial markets to increase rewards for shareholders rather than wages, globalization of trade and labor-saving technology.

A Pew Research report found, that for most U.S. workers, real wages have barely budged in a decade and that “despite some ups and downs over the past several decades, today’s real average wage has about the same purchasing power it did 40 years ago.”

While some can argue that wages have grown, unfortunately, they have not been distributed equally among all workers. By evaluating income gains since 2000, the Pew report found that wage increases largely go to already high-paying jobs. The top tenth of earners have seen a real wages rise to 15.7%, or $2,112 a week, since 2000. 

In comparison, the lowest tenth of earners have only seen gains of 3% in their weekly real wages. So for people with low paying jobs, the wage growth has been nearly five times lower than those of the top 10%.

Another real problem with stagnant wages is the negative impact on a person’s health and life expectancy. A recent article in the Journal of the American Medical Association (JAMA) examined the association between income and life expectancy. The study found that life expectancy continues to increase as income goes up. It also showed that the difference in life expectancy between the lowest- and highest-income quartiles is increasing over time.

There is new research from the University of Illinois that shows strong labor unions can have a positive impact on wages of non-union workers. Unions often influence public policies and programs that affect work hours, job security, health care and other social programs for all worker households. In the study it has been calculated that non-union workers would have seen 3% to 7% higher wage growth during their careers if U.S. labor unions were still strong.

The ILO’s Global Wage Report 2016/2017 has provided a number of policy recommendations to combat wage inequality, including:

  • Promote minimum wages by setting and adjusting the level to account for the needs of workers and their families as well as economic factors, including maintaining a high level of employment;
  • Collective bargaining at the national, industry and/or branch level in multi-employer settings with coordination across levels to ensure that a larger proportion of workers are covered;
  • Business should curtail excessive executive remuneration and take action on fair remuneration through their company-level compensation policies while strengthening transparency on remuneration and enhancing shareholders’ “say over pay”;
  • Promote productivity growth among sustainable enterprises to simultaneously permit higher average wages and reduce wage inequality;
  • Focus on higher productivity in low-paying enterprises accompanied by stronger wage policies and collective bargaining mechanisms;
  • Reduce gender pay gaps with enterprise-level job evaluations and passing legislation guaranteeing the right to equal wages for work of equal value and provide effective access to justice for workers to equal pay;
  • Develop policies that provide equal access to quality education, sustained skills improvement programmes and develop strategies for a better matching of jobseekers and available jobs.
From a social perspective, when workers and their families do not feel that they are receiving a fair share of the fruits of economic progress it fuels frustration. On the economic side, low wage growth dampens household consumption, which can reduce aggregate demand, particularly when wages remain stagnant in several large economies at the same time.

As ILO Director-General Guy Ryder stated at the World Bank Development Committee “increasing decent work opportunities and improving wages are key to breaking out of the slow growth trap and rekindling a virtuous circle of increased investment, rising productivity and sustainable enterprise and wage and consumption growth.”