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

2. 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’

3. « Subdued » Wage Growth

4. Exception: Pick –up in minimum wages

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

6. WAGES TOUCHING ROCK BOTTOM

7. UK: PAY STUMBLING ALONG

8. CEE: CONVERGENCE TOWARDS THE BOTTOM

9. WAGE DYNAMICS MODEST EVEN IN GERMANY

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

11. (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

12. AN IMF SIMULATION

13. ECB ACTUALLY COUNTING ON WAGE REVIVAL

14. (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

15. UNIT WAGE COSTS FAR BELOW 2%

16. ECB MISSING INFLATION TARGET

17. BEHIND THE EURO AVERAGE

18. IMF WAGE MODERATION SCENARIO

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

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

21. 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.

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

23. … 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

24. 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

25. 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

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

27. US: Prime Age Employment rate still below pre crisis level

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

29. 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

30. 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 »

31. 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 ?

32. TACKLING LOW PAY
WORKERS EARNING LESS 60% MEDIAN W

33. Wage inequality (D5/D1) and minimum wages 2014

34. NATIONAL MINIMUM WAGES

35. COLLECTIVE BARGAINING
RESPECT
RESTORE
PROMOTE

36. COLLECTIVE BARGAINING COVERAGE AND EXTENSION

37. EXTENSION AND EMPLOYER DENSITY

38. BARGAINING COVERAGE AND INEQUALITY