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Wage trends in the global economy have worsened

CP Chandrasekhar/Jayati Ghosh | Updated on March 23, 2021

Even before the Covid pandemic hit the world, real wage growth was sluggish everywhere except in China. The past year has seen further hits on wage incomes and employment

Lest we forget, the global economy was already sluggish and fragile before the Covid-19 pandemic struck; and within that, real wages were particularly slow-moving.

Wages did not keep pace with productivity growth anywhere, so wage shares of income were declining pretty much across the board.

 

The only significant example of real wage dynamism was that of China. As Chart 1 indicates, real wage growth in the world as a whole between 2006 and 2019 was substantially lower when China is taken out of the reckoning.

It is often believed that the Asian region as a whole was more dynamic, including in terms of wage increases, than the rest of the world. But Chart 2 belies this perception. Even within the Asian region, real wage growth was relatively slow (other than the apparent outlier year of 2016) and well below the rate of increase of real GDP, suggesting falls in wage shares of national income in the rest of Asia as well.

 

(Of course, despite higher real wage increases, wage share of national income also continued to fall in China as well, because of even faster labour productivity increases.)

First half badly hit

This was the situation before the Covid-19 pandemic swept across the world, wreaking havoc on health conditions and economies.

The first half of 2020 was the worst affected, as the combination of spread of disease and aggressive control measures like lockdowns meant that employment faced major declines.

 

Chart 3 indicates how this played out over the four quarters of 2020, by describing the extent of losses in working hours compared to the previous year for the world as a whole and for the sub-regions within Asia. It is evident that, across Asia, the first quarter of 2020 was the worst for job losses.

Even so, East Asia (including China) stands out for relatively minor declines in employment and very rapid recovery — also because the pandemic was largely brought under control in this region most effectively, notwithstanding sporadic outbreaks.

Among the regions of Asia, South Asia was clearly the worst affected. This was driven mostly by India, where there were very large declines in employment especially following the lockdown.

However, since the national lockdown in India started in late March, the biggest job losses were actually in the second quarter April-June 2020, so this estimate of more job losses in the first quarter is a little surprising.

Even so, South Asia was clearly among the worst affected regions in terms of absolute job losses, as estimated by the ILO.

 

While South Asia accounts for around a quarter of the world’s population, around one-third of total employment losses were in this region, as shown in Chart 4. It is likely that this estimate of 38 million decline in employment in the region over the course of 2020 is an underestimate, since the absence of more recent labour force data from India in particular does not allow for more exact projections.

In many developing countries — and particularly in developing Asia (other than China) with a preponderance of informal employment — the impact on wage incomes would have come not only through absolute declines in employment but falls in wages and income from self-employment.

The ILO Monitor (January 2021) notes that preliminary data from two-thirds of countries for which very recent statistics are available showed decreasing wages or slower average wage growth.

There were some countries in which average wages surprisingly increased; however, this was likely due to the “composition effect” because more jobs were lost in the lower-wage end of the spectrum.

In general, the ILO suggests that case studies generally show that workers across many countries have had to accept wage cuts and/or shorter working hours with associated lower total pay. In India, for example, one ILO study found that formal workers’ wages were cut by 3.6 per cent on average, while informal workers experienced a much sharper fall in wages of 22.6 per cent. (Xavier Estupiñan, Xavier, Anoop Satpathy, and Bikash K. Malick, “Wage Code and Rules – Will They Improve the Welfare of Low-Paid Workers in India?”, ILO Discussion Paper, New Delhi, 18 August 2020.)

Macroeconomic impact

This decline in wage incomes is bad not just from the point of view of worker welfare, but because of the adverse macroeconomic implications.

Such declines obviously mean that consumption increases will be suppressed, thereby affecting domestic demand and the incentive to invest, and setting the possibility of continued economic decline extending beyond the pandemic itself.

Unless governments — especially in South Asia — counterbalance this with increased spending, especially directed towards the poor and to buttress workers’ incomes, economic prospects for the region appear to be grim.

Published on March 22, 2021

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