Real Wage Growth in the World Economy

Prabhat Patnaik

THE International Labour Organisation (ILO) has just brought out its Global Wage Report 2018-19 which provides data on real wage growth in the world economy for 2017, the latest year for which such data are available. This shows that real wage growth for the world economy was 1.8 per cent in 2017, which

was not only lower than the 2.4 per cent growth of 2016, but was the lowest annual growth rate since 2008, and certainly lower than what the world economy experienced before 2008. Moreover, it is generally the case that China records a higher real wage growth compared to others, and its large weight pulls up the average for the world as a whole. If we exclude China, then the real wage growth in the world economy in 2017 comes to only 1.1 per cent, compared to 1.8 per cent in 2016.

What is particularly striking about the ILO figures is the virtual stagnation in real wages in the advanced capitalist countries. For the advanced G-20 countries, the real wage growth in 2017 was a mere 0.4 per cent, compared to 0.9 per cent in 2016 and 1.7 per cent in 2015. In Europe, excluding Eastern Europe, it was literally zero in 2017 compared to 1.3 per cent in 2016 and 1.6 per cent in 2015. And in the United States, it was 0.7 per cent in 2017 compared to 0.7 again for 2016 and 2.2 per cent in 2015.

The stagnation in real wages in the advanced capitalist countries is particularly remarkable because there has been much talk of a revival of their economies in the recent years and an associated drop in their unemployment rates. In the US for instance the unemployment rate has been officially calculated to be 3.7 per cent which is the lowest rate in 49 years. How is it possible that in a period when the labour market in the US is characterised by such tightness, the growth in the real wage rate has been so negligible?

Two further points need to be noted here. First, the ILO data are calculated on the basis of gross monthly wages and not hourly wage rates. Changes in the real wage rates across years therefore incorporate changes in both hourly rates and in the number of hours worked per month. Now, in a period when the unemployment rate is falling, the number of hours worked by a worker on average per month should also be increasing. If the real wage growth in 2017 is virtually negligible in the advanced countries according to the ILO, when the number of hours worked per month must be increasing per worker, then it follows that the hourly wage rate in real terms must have declined. The decline in real hourly wage rate in a period when data show that the labour market has been getting tighter, is intriguing.

Secondly, real wage growth is calculated by adjusting money wage growth for inflation. Since the wage bargain is in money terms, it is possible to imagine a situation where a tightening of the labour market increases the rate of money wage growth, but this does not translate itself into an increase in real wage growth because of inflation arising from increasing prices of inputs like oil, or from an increase in the profit mark-up by capitalists colluding to fix prices. What is striking about the ILO data however is that even the rate of money wage growth has not increased in this period when unemployment reportedly has been falling sharply. In other words, even when we look at money wage data, as opposed to real wage data, we still find little evidence of any tightness in the labour market.

In the US for example, we find that the rate of growth of money wages in 2014 was 2.4 per cent (over the previous year); in the subsequent three years it was 2.3 per cent, 1.95 per cent and 2.69 per cent respectively. Between the year 2014 and the year 2017 in other words there was hardly much of an increase in the annual rate of money wage growth. But the unemployment rate which stood at 6.6 per cent in January 2014 had come down to 3.7 per cent by October 2017. Almost a halving of the unemployment rate in other words scarcely increased the rate of growth of money wages. How is this possible?

The ILO report too is puzzled by this phenomenon and puts forward several hypotheses. Some of these simply would not do. For instance, it mentions a lower rate of labour productivity growth as a possible reason for the slowing down of real wage growth in 2017. But while this could certainly explain the slowing down of real wage growth, it cannot explain the virtual stagnation in real wages, since the rate of labour productivity growth, no matter what its magnitude, has always been higher than the rate of real wage growth. If labour productivity growth comes down, say, from 3 per cent to 2 per cent, then one can understand real wage growth too coming down from 3 per cent to 2 per cent; but one cannot understand why real wage growth should be close to zero when labour productivity growth is in excess of it. True, one can argue that higher prices of imported inputs like oil act as an independent factor to squeeze real wages; but that cannot explain why money wage growth too has not picked up despite the sharp fall in the unemployment rate.

The explanation clearly lies elsewhere. And two possible factors can be adduced here. One, the claims of economic revival in the advanced countries are themselves grossly exaggerated. When it is said that the unemployment rate in the US has fallen to as low as 3.7 per cent in October 2017, what is not often mentioned is that the labour force participation rate too has fallen: in October 2017 it was 62.9 per cent compared to 66.2 per cent in January 2008, i.e. before the crisis began. If the drop in labour force participation rate is assumed to be caused by “the discouraged worker effect”, i.e., if it is assumed that people are not actively seeking work because they do not think they will find work and hence have dropped out of the labour force, even though they would like to be employed, then the recalculated unemployment rate on the basis of the old labour participation rate will work out to be as high as 8.5 per cent. This of course may not be a correct assumption to make, but it does suggest that the 3.7 per cent unemployment rate cannot be taken at its face value when there is such a drop in the labour force participation rate. The virtual stagnation in real wages, and the lack of acceleration in money wage growth, both of which appear to be puzzling if we assume a tight labour market, will then cease to be puzzling, since the labour market is not as tight as is made out. The ILO report too, incidentally, mentions this possibility.

The second factor is the enormous attack on trade unions that has occurred of late which has weakened the bargaining strength of the workers. The rate of growth of money wages depends upon the unemployment rate, given the bargaining strength of the workers. If the unemployment rate falls but simultaneously there is a weakening of trade unions in various ways, including through the threat of relocation to lower wage locations (despite Trump’s protectionism), then clearly there would be no acceleration in money wage growth.

Pre-war fascist Japan provides the clearest instance of how a weakening of trade unions can ensure that the economy can enlarge its level of activity without causing any significant increase in money wages and prices. Increased armament expenditure under military rule pulled the Japanese economy out of the Great Depression. (Indeed Japan was the first country to come out of the Depression through the application of what may be called “military Keynesianism”). But the fascist nature of the regime ensured that trade unions were suppressed and Japanese recovery entailed very little increase in the money or the real wage rate despite a fall in unemployment. The US (and other advanced capitalist countries for that matter) may not of course be experiencing such attacks on unions; but the fact of the weakening of the unions to a very great extent under the regime of globalisation is indubitable.

The ILO report mentions, though in muted tones, both the attack on workers under neoliberalism and also the persistence of the crisis that has afflicted neoliberalism.

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