Workers’ Pay Lagging Behind Global Inflation

Annie Erling Gofus - Mar 29 2023
Published in: Global Workforce
| Updated Apr 27 2023
For many workers, the actual problem is that the growth in wages during the last year has not matched the surge in prices observed in major developed economies.

The International Labour Organization (ILO) has released its 2022-23 Global Wage Report, which shows that real wages worldwide have fallen by an average of 0.9%. “Real wages” are how much one can buy with their earnings, rather than just the amount of money one makes.

“The multiple global crises we are facing have led to a decline in real wages. It has placed tens of millions of workers in a dire situation as they face increasing uncertainties,” ILO Director-General Gilbert F. Houngbo said in a statement.

 The report indicates that workers’ money did not buy as much in 2021 as it did in 2019 due to prices increasing more than pay did, even though many people were employed. The nominal wage growth in the United States has also decreased significantly since mid-2021. Workers in the private sector with non-farm jobs earned an average of 4.4% more money per hour in the 12 months ending in January, which is less than the 5.6% increase reported in March of 2021, and even less than the 6.4% increase in consumer prices during the same period.

This decline is attributed to a combination of factors, including the global inflation crisis, lackluster economic growth, and an uncertain economic outlook. This marks the first time that real wages have decreased globally since the beginning of the 21st century.

The real issue for many workers is that the rise in wages over the past year has not kept up with the increase in prices seen in major advanced economies. The decrease or stagnation in wage growth coupled with rising costs of living is a global issue not just limited to the United States. Economies in both Europe and the United Kingdom are facing similar challenges.


Workers in Europe and UK Renegotiate Wages

As for the other side of the Atlantic, half a million public sector workers in the UK have taken action in response to low pay.

 In Britain, the increase in average wages decreased after the global financial crisis. Although it slowly improved in the second half of the 2010s, public-sector workers usually received smaller pay raises that did not keep up with the cost of living.

 In recent months, Britain has faced its highest inflation in 40 years, which has exceeded the pay increases offered to most public-sector workers. This has caused a crisis where even some employed people are resorting to food banks because of the high cost of living.

 When asked about wage stagnation by the BBC, Torsten Bell, chief executive of the Resolution Foundation, said, “Nobody who’s alive and working in the British economy today has ever seen anything like this.” He added, “This is definitely not what normal looks like. This is what failure looks like.”

 The cost of living is increasing in Europe, with high prices in countries like France, Germany, and Spain. Although wages did not increase as much as expected in 2022, it is anticipated that many unions in Europe will renegotiate agreements for many workers, resulting in better pay. Additionally, across Europe, governments are trying to increase wages for low-income earners, and the EU’s minimum wage rose by 12% in 2022.

 France and Germany have offered tax breaks to companies that provide their employees with significant bonuses rather than raising their wages to match the rising cost of living. While this approach may only be effective in the short term, it can increase people’s spending power, resulting in increased profits for businesses. Poland and Hungary have experienced double-digit wage growth, and public sector unions in Germany have called for strikes.

 As we consider the possibility of real wages bouncing back in the near future, the question arises as to why wages failed to keep up with inflation in the first place.


Why Do Real Wages Lag Behind Inflation?

It is worth noting that pay growth usually lags behind inflation. Therefore, the recent drop in pay growth may be reflecting the fact that inflation peaked in major economies such as the U.S. and Eurozone last year, and has since declined due to the sharp fall in energy prices and the easing of global supply-chain pressures.

The question remains: Why did wages fail to keep pace with inflation in the first place? One explanation is that wages are typically inflexible, adjusting at a slower pace than prices, which can fluctuate quickly. Companies may be hesitant to increase wages too quickly due to the negative impact on morale if they need to reverse the decision in the future.

The possibility of layoffs and sluggish economic growth may be dampening workers’ expectations, resulting in reduced wage demands. As a consequence, labor unions in Europe have shifted their focus from wage increases to job security concerns.

There are indications that real wages could bounce back in the near future. Across a variety of advanced economies, wage growth continues to be among the fastest it has been in at least a decade, which could persist as wage negotiations continue. 

So, how does this all affect the global labor market?


Real Wages Are Expected to Rebound

Unless there is a severe economic downturn, workers may continue to maintain some bargaining power as unemployment could remain relatively low. The labor supply, on the other hand, is facing limitations due to aging populations and worker absenteeism caused by illness, including COVID-19, across advanced economies.

It remains uncertain whether the labor markets have started to slow down enough to mitigate the momentum of wage growth, or if central banks will have to elevate interest rates and sustain them for a prolonged period to create job losses and financial distress.

 A lot of new jobs are being created, but the rate of increase in wages is slowing down. While workers may have some leverage in wage negotiations due to relatively low unemployment rates, there are also concerns about labor supply limitations resulting from aging populations and worker absenteeism.

Central banks are struggling to make a decision about whether to increase or decrease interest rates. If they raise interest rates, it may slow down how much wages increase. But if they keep interest rates low, it could create more jobs. 

We still don’t know how recent events have affected wages and employment. But, the economy has been creating many jobs while wages are increasing more slowly, which could mean the Federal Reserve can control inflation without hurting the economy with big interest rate hikes.


Do Wage Growth and Inflation Affect the Global Mobility Industry?

The decrease in real wages worldwide could have various impacts on businesses that hire workers internationally. Businesses may face challenges in attracting and retaining talent as employees’ purchasing power decreases. Lower wages may lead to higher turnover rates as workers may look for better-paying opportunities elsewhere.

If the cost of living in certain regions increases faster than wages, businesses may need to adjust their compensation packages to remain competitive. This could mean offering higher salaries, benefits, or incentives to attract and retain workers.

Businesses may need to be more mindful of wage discrepancies between regions. If real wages decrease in some areas while remaining stable in others, businesses may need to adjust their compensation packages accordingly to ensure equal pay for equal work.

Overall, the decrease in real wages worldwide could impact businesses’ recruitment and retention strategies, compensation packages, and overall cost structures.