Worrying trend as jobs are created but pay is not increasing

Wage growth is stagnant and worryingly uneven in its distribution as workers struggle to adapt to rapidly evolving world of work, says Stefano Scarpetta.

For the first time since the global financial crisis in 2008, there are more people working in the OECD area than there were immediately before it.

Unemployment rates are below, or close to, pre-crisis levels in all countries. Job vacancies have reached record highs in the euro area, the US, and Australia.

More of them remain unfilled for months, as labour market conditions tighten.

Yet, wage growth is still absent. As highlighted in this edition of the Employment Outlook report, OECD countries are now well into the growth cycle, but wage-growth remains remarkably more sluggish than before the crisis.

At the end of 2017, nominal wage growth in the OECD area was only half of what it was just before the great recession, for comparable levels of unemployment. And even when inflation is taken into account, real wage growth is a long way off pre-crisis trends.

True, in some countries with a long-standing recovery, a few wage agreements, entailing significant pay increases, have been signed recently, but these remain sparse.

Even more worrisome, this unprecedented wage-stagnation is not evenly distributed across workers. Real labour incomes of the top 1% of income-earners have increased much faster than those of median full-time workers in recent years, reinforcing a long-standing trend.

This, in turn, is contributing to a growing dissatisfaction with the recovery: while jobs are finally back, only some fortunate few at the top are also enjoying improvements in earnings and job quality.

As the labour market tightens up and a growing number of vacancies remain unfilled, why is wage pressure not increasing?

A first answer lies in the slowdown in productivity growth. 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.

While the reason behind this slowdown is one of the most hotly debated issues in macroeconomics, productivity trajectories have, however, been very heterogeneous across firms.

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, widening the gap from the top performers.

In other words, productivity growth has become even more concentrated, with limited spillovers from the frontier to follower firms.

Aggregate productivity gains are now led by highly technological, innovative firms, which enjoy increasingly large market shares to their competitive advantage.

Frontier companies 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 value-added that goes to workers.

The second answer relates to the changing nature of skills demand and its relationship to the skills available in the workforce. The jobs destroyed during the crisis are not the same as those created in the recovery.

Leading firms are in great demand of highly-qualified personnel, with high-level cognitive skills — such as complex problem solving, critical-thinking and creativity — and social intelligence/social perceptiveness needed when persuading, negotiating, and caring for others.

These skills are in short supply in many countries and people who possess them have been the main beneficiaries of wage growth. However, 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.

Declining coverage of unemployment benefits in many countries, and mounting long-term unemployment in the aftermath of the crisis, may also have contributed to low wage growth.

Jobseekers may have become less selective when nearing exhaustion of their benefit rights and may tend to accept jobs not matching their expectations, in terms of hours worked, contractual arrangements, and, especially, wage levels.

In a number of OECD countries, particularly those hit hard by the financial crisis and then by the sovereign debt crisis, the overall, annual growth of real monthly wages would have been higher had the number of those newly hired after an unemployment spell not increased so much and their wage evolved along the lines of other workers.

For example, in Spain average real wages would have been 3.1% higher by 2014, had average wages grown at the same rate as the wages of those continuously employed since 2007.

Many of the workers who lose their jobs for economic reasons typically face structural challenges that put them at risk of long-term unemployment, unless skills profiling, re-training, and counselling are provided early enough.

In this context, it is crucial that countries develop high-quality education and training systems that provide learning opportunities throughout the life course.

But learning opportunities cannot stop at school and university. Adults must be given continuous opportunities to develop, maintain, and upgrade skills at all ages, with a view to preventing skills obsolescence and depreciation.

Yet, workforce groups at greater risk of labour-market disadvantage receive less training, both formal and informal, which compounds their disadvantage. Across all OECD countries, the low-skilled have a probability of being involved in training that is only one-third of that of the high-skilled.

Co-operation and co-ordination among social partners have a key role to play, but this requires addressing the long-term trend decline in union membership and eroding role of collective bargaining in a number of countries.

The persistent, overall degree of wage moderation masks large differences between workers, but also reflects structural changes in our economies that the global financial crisis has deepened and accelerated.

Some stronger wage rises are expected, as the labour market tightens further.

But 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.

Stefano Scarpetta is the OECD director for employment, labour, and social affairs