Thursday, January 10, 2019

Poor wage growth in rich world despite jobs recovery

Despite jobs recovering to pre-Great Recession levels or higher, wage growth has been near-stagnation levels in several countries with workers down the economic pyramid taking much of the pain.

Real wages in the period 1999-2017 have almost tripled in the emerging and developing countries of the G20 (Group of Twenty comprising 19 countries + the European Union), while in advanced G20 countries they have increased by a much lower total of 9%. 

Global wage growth in 2017 based on International Labour Organisation (ILO) data on 136 countries,  was not only lower than in 2016, but fell to its lowest growth rate since 2008, remaining far below the levels obtaining before the global financial crisis.

The ILO in its Global Wage Report 2018/2019 published in November 2018 (see chart above), said that in real terms (adjusted for price inflation) wage growth has declined from 2.4% in 2016 to just 1.8% in 2017. If China is excluded from the global average, global wage growth in real terms fell from 1.8% in 2016 to 1.1% in 2017.

The ILO says that in the advanced G20 countries, real wage growth declined from 1.7% in 2015 to 0.9% in 2016 and 0.4% in 2017.

"In Europe (excluding Eastern Europe), real wage growth declined from 1.6% in 2015 to 1.3% in 2016 and further declined to about zero in 2017, owing to lower wage growth in countries including France and Germany, and declining real wages in Italy and Spain; in Eastern Europe, by contrast, real wage growth recovered from its 4.9% decline in 2015 and continued to increase thereafter, from 2.8 per cent in 2016 to 5.0% in 2017. Real wage growth in the United States declined from 2.2% in 2015 to 0.7% in both 2016 and 2017."

In emerging and developing countries of the G20, real wage growth has fluctuated in recent years, rising from 2.9% in 2015 to 4.9% in 2016, and then falling back to 4.3% in 2017.

In China average real wages almost doubled between 2008 and 2017.

Real wage growth is calculated using gross monthly wages, "rather than hourly wage rates, which are less frequently available, and fluctuations reflect both hourly wages and the average number of hours worked."

The chart below is from a July 2018 presentation by the Organisation for Economic Cooperation and Development (OECD) on the Employment Outlook 2018 report from the think-tank for mainly rich country governments.

2018

Last Friday (Jan 4, 2019) the US Bureau of Labor Statistics (BLS) reported that an impressive 312,000 jobs were added in December, bringing the 2018 payrolls gain to 2.64m — up from 2.19m in 2017. Meanwhile, the unemployment rate rose from a five-decade low to 3.9%, reflecting more people actively seeking work.

Average hourly earnings at nominal value rose 3.2% in the year, which matched the fastest pace since 2009.

However, the inflation-adjusted (real) rise in hourly earnings was just over 1% in 2018 — the BLS reported that real average hourly earnings increased 1.1%, seasonally adjusted, from December 2017 to December 2018. The change in real average hourly earnings combined with no change in the average workweek resulted in a 1.2% annual rise in real average weekly earnings. The Consumer Price Index (CPI) fell 0.1% in the month of December because of a dip in the price of gasoline.  

Eurostat data show a rise of 2.4% in the nominal index of wages and salaries in the Euro Area in the third quarter of 2018 compared with the same period in 2017. The rise in the EU28 was 2.7%

The provisional rise in Ireland was +2.5%; +2.7% in Germany; +2% in the UK and the provisional level in France was +1.7%. 

The annual inflation rate in the Euro Area and EU in September was 2.1%

The lowest annual rates were registered in Denmark (0.5%), Greece (1.1%) and Ireland (1.2%). The highest annual rates were recorded in Romania (4.7%), Hungary (3.7%) and Bulgaria (3.6%). Compared with August 2018, annual inflation fell in nine member sates, remained stable in four and rose in fourteen

The highest annual increases in hourly labour costs for the whole economy were registered in Romania +13.9 %; Latvia 13.2 % and Lithuania +10.7 % while the lowest annual increases in hourly labour costs were recorded in Belgium +1.2 %; Portugal +1.5 % and Malta and Finland both at +1.6 %. 

In 2018 the European Central Bank (ECB) acknowledged in a report in 2018 that the current recovery that began in the 19-country Euro Area in Q1 2013, has been the weakest since the 1970s.  

"From a historical perspective, the expansion in private consumption has nevertheless remained weak. In fact, the current expansion in private consumption is among the weakest since the 1970s. However, the recent expansion in GDP has also been among the slowest on record. This observation is again not confined to the euro area only. Most industrialised countries have witnessed GDP growth below that of previous expansions. This raises the question as to how much factors specific to the household sector (e.g. income and wealth developments, or borrowing constraints) have dampened the expansion in private consumption. In other words, has consumer spending that is conditional on household income and wealth been exceptionally weak during the past five years?"

According to Eurostat, in real terms, household disposable income grew by 16% in total in the EU between 2000 and 2009. Following the financial crisis, it decreased by around 3 % between 2009 and 2013 and then rose by 5 % between 2013 and 2016.

Household disposable income increased by around 18% in total between 2000 and 2016, representing an average growth rate of 1% per year.

The Irish level was volatile as seen in the chart below reflecting boom and bust — the real rise in 2001 alone, was almost 9%!

Wage growth 2000-2007 and 2008-2017

In 2000-2017, real earnings rose 23% in Ireland and gained 2% in 2008-2017. In the UK the outcome was 18% and a decline of-3% while in Germany it was 1% in 2000-2017 and 12% in 2008/2017. The US real rises were 9% and 5.5%.

See chart at bottom of page and OECD data for average annual wages for all OECD members here

The OECD said in its Employment Outlook 2018 that wage growth remained remarkably more sluggish than before the financial crisis. At the end of 2017, nominal wage growth in the OECD area was only half of what it was ten years earlier: "in Q2 2007, when the average of unemployment rates of OECD countries was about the same as now, the average nominal wage growth was 5.8% vs 3.2% in Q4 2017."

1)  The think-tank said that all else equal, low productivity growth puts a brake on wage growth. "While in the years before the crisis hourly labour productivity was growing at 2.3% per year on average in the OECD area, it slumped during the recession. And the chasm, which opened in the early years of the global financial crisis, has not been filled yet: productivity growth levelled off at 1.2% on average over the past five years, and at less than 1% in several countries, including France, Italy, Japan, the United Kingdom and the United States...Leading firms, at the technological frontier, have enjoyed strong productivity growth similar to that of the pre-crisis period, but follower firms have experienced sluggish productivity growth"

2) Companies at the technological frontier invest massively in capital-intensive technologies and thus tend to have lower labour shares, while reallocation of market shares towards these “superstar” firms further contributes to a lower part of the value added that goes to workers.

3) Frontier firms seek skills that are in short supply in many countries and people who possess them have been the main beneficiaries of wage growth. However, the OECD says many workers are not well equipped to meet the emerging demand for these high-level skills. According to the Survey of Adult Skills, almost one-in-four adults lack even basic information-processing skills (digital skills) and can only do simple tasks on computers, which prevents them from accessing jobs in which pay is increasing.

4) The earnings prospects of many workers "may well remain meagre as they struggle to adapt to a rapidly evolving world of work. Well-targeted policy measures and closer collaboration with the social partners can and should help these workers address their growing disadvantages by providing them with training and retraining opportunities as well as career guidance and information to foster mobility."

Researchers at the International Monetary Fund (IMF) have estimated that of 22 economies in 1970-2015, only 4: Greece, Czech Republic, Luxembourg, Sweden and South Korea had expanded the labour share in the value of economic output (GDP).

Deregulation, the declining power of trade unions, globalisation, technology, and falling competition are among the contributors to greater inequality and earnings.

According to the Economist in November 2018:

[Global “excess” profits are $660bn. Some 72% of that is made by American firms, split between tech, health care and sectors that are not exposed to trade, such as airlines and defence. Other industries that are exposed to trade, including manufacturing, are less important. Europe accounts for 26% of the global pool of excess profits....At the national level, America and Europe can be examined using three tests: concentration, abnormal profits and openness. America scores badly. Take concentration first...between 1997 and 2012 it rose in two-thirds of 900-odd census industries, with the weighted average market share of the top four firms growing from 26% to 32%. It continued to rise in 2012-14. A tenth of the economy is made up of industries where four firms have more than two-thirds of the market.

Profits are indeed abnormally high. A good measure is the free cashflow of corporate firms. This is 76% above its 50-year average, relative to GDP...of the listed (US) firms that made a very high return in 1997, 50% still did in 2017 (using a hurdle of 15% and excluding goodwill). Fewer new firms are being started. And America’s opening up to the world has stalled, with trade to gdp falling steadily since 2011 and the output of foreign firms’ subsidiaries in America stagnating ]