The global economic crisis is expected to lead to painful cuts in the wages of millions of workers worldwide in the coming year, emphasises the International Labour Organisation (ILO), in it recently published Global Wage Report 2008/09.

“For the world`s 1.5 billion wage-earners, difficult times lie ahead,” said ILO`s Director-General, Juan Somavia, on the occasion of the release of the report on 25 November 2008. He emphasised that, “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 IMF 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 the major economies. Overall, the wage growth in industrialised countries is expected to fall, from 0.8 per cent in 2008 to -0.5 per cent in 2009.

According to the report, between 1995 and 2007, each additional 1 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 the 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 2 per cent per year in half of the world`s countries, the report says.

There were wide regional differences. The growth in real wages was about 1 per cent per year or less in most developed and Latin American countries, but reached 10 per cent or more in China, Russia and a number of other transition countries.

Unsustainable Growth in Wage Inequality

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. Of the developed countries, 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 that have succeeded in reducing wage inequality include France, Spain, Brazil and Indonesia, though in the latter two countries, inequality remains at a high level.

The pay gap between genders is still high and closing only very slowly. 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 a majority of the countries, women`s wages represent on an average between 70 per cent and 90 per cent of the men`s wages but it is not uncommon to find much lower ratios in other parts of the world, particularly in Asia.

Wages to Support the Real Economy

Based on an analysis of the 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 1 per cent decline in GDP per capita, average wages fell even further by 1.55 percentage points – a result that points to the possible effects on wages in the current crisis.

“If this pattern were to be followed in the rapidly spreading global downturn, it will deepen the recession and delay the recovery,” Mr. Somavia said.

As the reports says, “In this context, governments are encouraged to display a strong commitment towards protecting the purchasing power of wage earners and hence stimulating internal consumption. Firstly, social partners should be encouraged to negotiate ways to prevent a further deterioration in the share of wages relative to the share of profits in GDP. Secondly, minimum wages should effectively protect the most vulnerable workers. Thirdly, minimum wages and wage bargaining should be complemented by public intervention through, for instance, income support measures.”

The report shows that minimum wage and collective bargaining can be efficiently combined. 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.

“The legitimacy of globalisation and of open economies and societies hinges critically on greater fairness in outcomes. Central to this fairness is the ability of working women and men to obtain a fair share of the wealth they create,” Mr. Somavia said.