Before the financial crisis, real average wages in developed economies grew by an average of about 1 per cent per year, and global wage growth was about 3 per cent.

Such figures have since changed in recent years; wage growth in developed economies almost stands at zero, and global wages are growing by 2 per cent. If you take China out of the equation, the global wage growth is quite simply cut in half.

So when are workers in developed economies going to ask for more wage increases? Well, the answer in many countries is: they are asking already.

An analysis of the parallel evolution of labour productivity and real wages in developed economies shows that since 2010 – while wages are flat – productivity growth is back on track, with of course some differences across countries.

The report shows that over the last 15 years, the decoupling of wages and productivity was most obvious in Germany, Japan, Spain or the United States.

Taking a shorter time horizon, the United Kingdom saw its real average wages fall by a total of 7 per cent since 2007.

As a result of the different trends across the world, average wages in emerging and developing economies are slowly converging towards average wages in developed economies, even if differences remain important.

Comparing the purchasing power of their wages, an average American worker is still earning three times as much as a Chinese worker, but the gap is declining
fast.

If wages continue to stagnate in the U.S., and assuming that Chinese wages growth slows to an average of 5 per cent per year in the future, it would take no longer than about 25 more years for China to catch up.

Household income inequality

The report also looks at the link between wages and household income inequality.

We know that since the mid-1980s, income inequality has increased in a majority of advanced economies, and the Organisation for Economic Co-operation and Development (OECD) has singled out growing wage inequality as the single most important reason.

High inequality can lead to a deterioration of social mobility, social cohesion and well-being.

High inequality also reduces economic growth. This is particularly the case when inequality has adverse effects on education and heath, on political and
economic stability, and on the social consensus necessary for well-functioning societies.

In addition, low wage growth holds back household consumption, with possible adverse effects on investment and on overall aggregate demand.

The Global Wage Report points to changes in wages and paid employment as key factors underlying more recent inequality trends, covering the years of the crisis.

In developed countries where household income inequality increased, other income sources offset about one third of the increase in inequality due to changes in wages and employment.

This finding is perhaps not too surprising given that, in developed economies, wages usually represent about 70 to 80 per cent of total income for households with at least one member of working age.

Middle-classes frequently rely more than 80 per cent upon their wage incomes. Therefore more wage inequality immediately stretches the middle-class.

At the bottom end of the distribution, low pay, underemployment or job losses are the main reason for low-incomes, whereas social transfers can only partly compensate for these problems.

With low wages and more unemployment, lower-income groups thus tend to fall further behind.

So while the IMF considers that inequality is best corrected through fiscal policies (taxes and transfers), the reality is that increasing inequality in the labour market places a heavier burden on efforts to reduce inequality through taxes and transfers.

Furthermore, the past few years have also shown that more redistribution through taxes and transfers politically is not always feasible to say the least. In many countries, taxation systems have become less progressive over recent years.

In emerging and developing economies, self-employment income generally comprises a larger share of household income than in developed economies, particularly among low-income groups.

But this does not change the fact that where inequality has been reduced, this was mostly due to a more equitable distribution of wages and the creation of paid employment for low-income households.

In Argentina and Brazil, where inequality fell considerably over the last ten years or fifteen years, changes in the distribution of wages and paid employment
accounted for 87 per cent of the decade-long reduction in top–bottom inequality in Argentina, as they did for 72 per cent in Brazil.

Direct employment programmes (as in India and South Africa) and conditional or unconditional cash transfers (as in Brazil and Mexico, among many other countries) have made further contributions to lifting the income of low-income groups.

What can be done?

The Global Wage Report suggests combined policy action on at least two fronts.

First: redistribution through fiscal policies, with more progressive taxation and some targeted tax reductions or positive tax-credits to low-income households
(such as through in-work benefits), improved tax collection through efforts to formalise informal enterprises and workers, and the development of social protection systems – which in practice account for most of the redistribution through fiscal policies.

Secondly: reduced inequality in the labour market through the pursuit of full-employment policies, more and better education for those at the bottom of the distribution, well enforced minimum wages set at a level that takes into account
needs of workers and their families as well as economic factors, and inclusive and encompassing collective bargaining systems.

Without strong action in the labour market, current trends in many countries will place a heavy burden on reducing inequality through redistribution mechanisms alone, and the labour income share will probably continue to decline.

The Global Wage Report also shows that there are still persistent wage gaps between men and women as well as between national and migrant workers, or formal and informal economy workers.

Extending minimum wages and collective bargaining to low-paid workers will also generally be helpful in reducing these pay gaps, given the over-representation of women, migrants and vulnerable groups in low-paying jobs.

This article was initially published in the Global Labour Column.