What happened to wage growth?

by Stefano Scarpetta, Director for Employment, Labour and Social Affairs

Economic growth is strengthening and becoming widespread, leading to improvements in labour markets. In 2017, the average employment rate across OECD countries was 61.7% compared to 60.8% before the crisis (age group 15–74). Unemployment is approaching its lowest level since 1999: 5.4% in the first quarter of 2018. Job vacancies are at record high in the euro area, US and Australia.

Econ 101 would suggest that, in response, wages growth would pick up: lower unemployment means more competition among employers for workers. And yet — that’s not what we’re seeing. At the end of 2017, nominal annual wage growth in the OECD area was 2.1%, only half of what it was just before the Great Recession, for comparable levels of unemployment. Even when inflation is taken into account, real wage growth is a long way off pre-crisis trends: average annual wage growth in real terms has gone down from 2.4% in Q4 2007 to 1.5% on average in Q4 2017.

Labour productivity growth (defined here as GDP per total hours worked) has not fully recovered since the crisis. It moved into negative territory in the midst of the crisis but even now, well into the recovery, labour productivity growth at 1% remains about half of what it was before the crisis.

Moreover, aggregate labour productivity growth eclipses vast differences between leading firms (often at the technological frontier) and laggard firms, which have not been able to keep up. In laggard firms labour productivity growth was extremely slow and severely constrained wage growth. In leading firms labour productivity growth was much higher, but even their wage growth did not keep up with productivity gains. All in all, if the growth in real median wages had followed the productivity growth closely over the 1995 to 2013 period, real median wages would have been 13% higher.

Globalisation and technological change have increased demand for highly qualified individuals with high-level cognitive skills and social intelligence. These workers have seen their wages grow faster.

But many workers are not equipped with such skills: almost one in four adults lack even basic information-processing skills. And because the number of middle-skill jobs has been declining across the OECD , low- and middle-skill workers that do not upskill or reskill will struggle to enter the high-skill labour segment and experience more substantial wage growth.

Some of these trends were already in progress well before the crisis — in large part driven by technological change, as well as globalisation and population ageing. Bringing jobs back to the economy was the priority for the recovery, but now policymakers need to address these structural challenges to avoid a future of wageless growth.

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