Declining wages threaten economic recovery

Global growth in real wages slowed dramatically in 2008 as a result of the economic crisis.

Wages are expected to drop even further this year despite some signs of an economic recovery, the International Labour Organization (ILO) reports.

“The continued deterioration of real wages worldwide raises serious questions about the true extent of an economic recovery, especially if government rescue packages are phased out too early. Wage deflation deprives national economies of much needed demand and seriously affects confidence”, said Manuela Tomei, Director, ILO Conditions of Work and Employment Programme and lead author of the study.

Consumption accounts for seventy percent of the U.S. economy and has been the engine of growth for almost thirty years. A continued decline in real wages will further depress consumption at a time when U.S. consumers are already tapped out on credit, business investment is stagnate, unemployment is expected to rise to over 10% and banks remain reluctant to make loans.

If real wages continue to decline economists worry that the 3.5% increase in GDP last quarter, driven by federal stimulus spending including the cash for clunkers program and the homeowners tax credit, will not be sustainable.

In this context Milwaukee County Executive and Republican candidate for Governor Scott Walker's pledge to cut wages if elected would undermine any possibility of economic recovery in Wisconsin.

The ILO adopted a Global Jobs Pact at the International Labour Conference in June that calls for measures to maintain employment and avoid the damaging consequences of deflationary wage spirals and worsening working conditions.

The update of the Global Wage Report says “the picture on wages is likely to get worse in 2009” regardless of other economic indicators suggesting an economic rebound. The report notes that in half of the 35 countries for which figures are available, real monthly wages fell in the first quarter of 2009 compared to their average of 2008, often due to cuts in hours worked.

The current deterioration in wages follows a decade of wage moderation before the global economic crisis. The report says that years of stagnating wages relative to productivity gains – together with growing inequalities – have contributed to the crisis by limiting the ability of many households to increase consumption other than through debt.

“In the future, restoring the link between productivity growth and wage increases is essential for economic and social sustainability. Companies should be able to achieve competitiveness through rising productivity rather than by cutting labour costs, and workers should have sufficient bargaining position to defend their wages. This will go a long way towards addressing income inequalities”, Ms. Tomei said.

The report also concludes that excessive bonuses, unrelated to actual performance, contributed to the crisis by distorting incentives in the financial sector and promoting short-term risk taking.