The pay squeeze

For several years now there has been a squeeze on wages. This follows the disastrous price-wage spiral of the 1970s.

After the financial crisis of the previous decade, governments and financial authorities now have the opposite concerns: the stagnant wage levels.

For several years now there has been a real squeeze on wages. Across the world this trend is going on. According to the Organization for Co-operation and Development, real wages, adjusted for inflation, at best remained flat, but in Britain they have fallen sharply – as is the case in parts of Europe, such as Spain and Portugal.

These trends come as a shock as we have been accustomed to wages rising constantly. Yet this turn of events should not come as a surprise as wage levels are tied to productivity. Productivity gains have been meagre. Thus in North America wages have risen at a rate of less than one per cent in nominal terms.

The proportion of adults who are either at work or looking to be employed had declined for three years, ever since the financial crisis in the previous decade, lower by approximately three per cent because of the relatively weak economy. Employers were unable to reduce wages when the economy was slumping.

Nowadays they have not been increasing wages because of the currently tepid recovery. The economy is gradually improving, however. When this shift occurs, as appears to be underway now, increases in wages are likely to occur. There has been no rise in inflation with the presently-muted economy.

Governments everywhere are anxious to avoid a deflationary cycle. Then that would enable the economy to move higher and rebound in wages would follow.

Wages obviously are important to all workers, but to government as well. A weak expansion entails less government revenues and handicaps social security contributions. The lack of wage growth adversely affects household incomes and consumer spending.

For our economy to have a real, sustained upward move, the pay squeeze must be replaced by wage increases. As baby boomers gradually retire it will be difficult for the workforce to grow.

When that occurs, participation rates will expand and then the pay squeeze will be replaced by stronger gains in wages.

That change cannot happen too soon for all concerned. Better times are coming.



Bruce Whitestone