PAY RISES : A PLUS FOR THE ECONOMY Presentation to PERC Summer School Meeting September 2017 Ronald Janssen, TUAC

OECD has special focus on wages « A durable upturn in consumption requires stronger wage growth » A puzzle: Wage growth has been remarkably stable, despite higher employment and lower unemployment This is projected to change only slowly Reason: Not much support to be expected from employment growth since the latter has recovered ‘relatively well’

« Subdued » Wage Growth

Exception: Pick –up in minimum wages

WAGES FAIL TO RECOVER The economy has escaped recession but wages are failing to recover

WAGES TOUCHING ROCK BOTTOM

UK: PAY STUMBLING ALONG

CEE: CONVERGENCE TOWARDS THE BOTTOM

WAGE DYNAMICS MODEST EVEN IN GERMANY

WAGE STAGNATION IS BAD FOR THE ECONOMY HOLDING BACK THE RECOVERY FEEDING FORCES OF DEFLATION INCREASING INEQUALITIES PREVENTING UPWARD CONVERGENCE OF WAGES IN CEE

(1) WAGES STRENGHTEN DEMAND AND ACTIVITY PERSPECTIVE OF INDIVIDUAL FIRM: WAGES ARE JUST A COST MACRO PERSPECTIVE: SQUEEZING WAGES UNDERMINES DEMAND FOR GOODS AND SERVICES “MY WAGE = MY SPENDING = YOUR JOB” Example of football stadion

AN IMF SIMULATION

ECB ACTUALLY COUNTING ON WAGE REVIVAL

(2) WAGES AS AN ANCHOR OF PRICE STABILITY A KEY OBJECTIVE OF CENTRAL BANKS: KEEP INFLATION UP (at least 2 5%) TO KEEP ECONOMY AWAY FROM DEFLATION ZERO WAGE COSTS = NO PRESSURE ON BUSINESS TO RAISE PRICES

UNIT WAGE COSTS FAR BELOW 2%

ECB MISSING INFLATION TARGET

BEHIND THE EURO AVERAGE

IMF WAGE MODERATION SCENARIO

(3) WAGES AND INEQUALITY Trade unions often lectured on aligning wages with productivity. Fact is that, for decades, real wages have stayed behind productivity

LABOUR SHARE IN DECLINE Previous implies factor of capital has taken much of the productivity gains. Mind the CEE

WAGES AT THE TOP PULLING AWAY Second dimension is inequality within group of workers. Systematic statistics are scarce. However OECD approaches this by calculating ratio between median and average wage. So if CEO pay gooes up, average wage also goes up but not the median wage, hence ratio falls. Has happened everywhere around Europe with the exception of Spain but we do not know what happened after 2013.

(4) PREVENTING CATCH UP OF CEE Wages per hour in CEE losing traction from 2008 on

… DESPITE MUCH SMALLER GAPS IN PRODUCTIVITY WAGE IN CZ 33% OF WAGE IN DE….WHILE PRODUCTIVITY IN CZ IS 67% OF DE WAGE IN RO 9% OF DE WAGE….WHILE PRODUCTIVITY IN RO IS 44% OF DE THESE STATISTICS BIASED DOWNWARDS IN FDI RECEIVING COUNTRIES(see ETUI WP 2016/08) EXAMPLE OF SKODA/CZ PRODUCING 26 CARS PER WORKER VERSUS 11 PER WORKER IN VW/DE

LOW WAGE STRATEGY NOT SUSTAINABLE OTHER PARTS OF THE WORLD OPEN UP AND DEVELOP AND BECOME NEW COMPETITORS TO KEEP AHEAD, CEE NEED TO UPGRADE INTO MORE SOPHISTICATED PARTS OF VALUE CHAINS HIGHER WAGES PROVIDE INCENTIVE TO DO SO…ALSO RETAINING SKILLS

What explains the puzzle What explains the puzzle ? (1) Labour market slack greater than open unemployment While open unemployment almost back to pre- crisis level, involuntary part time is still 1pp higher, also relatively more marginal attached workers Echoed by ECB’s Monthly Bulletin: Broader labour market slack affecting 18 (!)% of the euro area’s labour force. For OECD around 11,5% or double open unemployment rate

Behind the OECD average: Some results for EU countries source Eurostat 2008 number for France without available but not loooking for work

US: Prime Age Employment rate still below pre crisis level

What explains the puzzle What explains the puzzle ? (2) Reduced slack now has smaller impact on wages

What explains the puzzle ? (3) Low productivity growth Neo classical view: Wages equal productivity However, recogition that « rising productivity may no longer be sufficient to raise wages » For the typical worker, productivity growth has decoupled from wage growth, especially in the lower part of the earnings distribution

So what to do about it ? « Wage pressure should eventually show up as labour markets continue to tighten» Additional demand policy to « fully eliminate existing labour market slack and strenghten productivity »

EUROPEAN WORKERS NEED A PAY RISE TO SUPPORT RECOVERY TO GET BACK TO PRICE STABILITY TO PROMOTE FAIR DISTRIBUTION OF ECONOMIC PROGRESS WHAT IS TO BE DONE ?

TACKLING LOW PAY WORKERS EARNING LESS 60% MEDIAN W

Wage inequality (D5/D1) and minimum wages 2014

NATIONAL MINIMUM WAGES

COLLECTIVE BARGAINING RESPECT RESTORE PROMOTE

COLLECTIVE BARGAINING COVERAGE AND EXTENSION

EXTENSION AND EMPLOYER DENSITY

BARGAINING COVERAGE AND INEQUALITY