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Salary cuts lie ahead, middle class to be hit, says ILO

Source: PTI
November 26, 2008 12:05 IST
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It is bad news on the wages front in the wake of global economic meltdown. An International Labour Organisation study says the global economic crisis is expected to lead to 'painful cuts' in the wages of millions of workers worldwide in the coming year.

"For the world's 1.5 billion wage-earners, difficult times lie ahead," says ILO Director-General Juan Somavia on the Global Wage Report 2008-09 published on Tuesday. The report warns that tensions are likely to intensify over wages.

Somavia says, "Slow or negative economic growth, combined with highly volatile food and energy prices, will erode the real wages of many workers, particularly the low-wage and poorer households. The middle classes will also be seriously affected."

Based on the latest International Monetary Fund growth figures, the ILO forecasts that the global growth in real wages will at best reach 1.1 per cent in 2009, compared to 1.7 per cent in 2008, but wages are expected to decline in a large number of countries, including major economies.

Overall, wage growth in industrialised countries is expected to fall, from 0.8 per cent in 2008 to -0.5 (minus 0.5) per cent in 2009.

The ILO report shows that this bleak outlook follows a decade in which wages failed to advance in lockstep with economic growth.

According to the report, between 1995 and 2007, each additional one per cent in the annual growth of GDP per capita led to on average only a 0.75 per cent increase in annual growth of wages.

As a result, in almost three-quarters of countries worldwide the labour share in GDP has declined.

While inflation was low and the global economy grew at a 4.0 per cent annual rate between 2001 and 2007, growth in wages lagged behind, increasing by less than two per cent per year in half of the world's countries, the report says.

Pointing out 'wide regional differences', the report says the growth in real wages was about one per cent per year or less in most developed and Latin America countries, but reached 10 per cent or more in China, Russia and a number of other transition countries.

The report also shows that since 1995, inequality between the highest and lowest wages has increased in more than two-thirds of the countries surveyed, often reaching socially unsustainable levels.

Among developed nations, Germany, Poland and the United States are among the countries where the gap between top and bottom wages has increased most rapidly. In other regions, inequality has also increased sharply, particularly in Argentina, China and Thailand.

 Some of the countries which have succeeded in reducing wage inequality include France and Spain, as well as Brazil and Indonesia, though in these latter two countries inequality remains at a high level, it says.

Noting that pay gap between genders is still high and closing very slowly, the report said although about 80 per cent of the countries for which data are available have seen an increase in the ratio of female to male average wages, the size of change is small and in some cases negligible.

In the majority of countries, women's wages represent on average between 70 per cent and 90 per cent of men's wages, but it is not uncommon to find much lower ratios in other parts of the world, particularly in Asia.

Based on an analysis of major trends in the level and the distribution of wages around the world in recent years, the ILO report shows that while wage growth has lagged behind overall economic growth during upswings, it slowed down more rapidly during economic downswings.

According to the report, between 1995 and 2007, for each one per cent decline in GDP per capita, average wages fell even further by 1.55 per centage point - a result that points to the possible effects on wages of the current crisis.

"If this pattern were to be followed in the rapidly spreading global downturn it would deepen the recession and delay the recovery," Somavia said.

In this context, the reports says, governments are encouraged to display a strong commitment towards protecting the purchasing power of wage earners and hence stimulating internal consumption.

It suggests that minimum wages should effectively protect the most vulnerable workers.

The report shows that minimum wage and collective bargaining can be efficiently combined. This is because, higher coverage of collective bargaining ensures that wages are more aligned with economic growth, and also contributes to lower wage inequality.

At the same time, effective minimum wages -- by providing a wage floor - can reduce wage inequality in the bottom half of the wage distribution, limit low pay, and reduce the gender pay gap.

The ILO study already reports a reactivation of minimum wages around the world in recent years, to reduce social tensions resulting from growing inequalities.

Globally, over the period 2001-2007, minimum wages were allowed to rise by an average of 5.7 per cent per year in real terms -- contrasting with some previous periods when the real value of the minimum wage had declined -- and to increase in proportion to the average wage.

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