Unemployment down, but wage growth stagnates

Despite unemployment falling to multi-year lows across the developed and parts of the developing world, real wage growth is slowing to the point of stagnation. That might not come as a surprise to most people. The real question is why is this happening?

The conundrum has economists scratching their heads, because situations of high employment should mean competition for resources is high, in turn driving wages upwards. The current situation has been confirmed by research by Oxford Economics and recruitment specialist Hays into the world’s 34 major economies, which aims to identify the trends, challenges and opportunities facing the world’s workers and employers.

The results are packaged into a report, the Hays Global Skills Index 2019/2020, which is in its eighth year of publication. Real wage growth has slowed since the financial crisis, falling from an average of 1.5% growth a year to 0.7%.

What is surprising is that traditional rules – when high levels of employment are associated with rising wages as companies increase pay to retain staff and offer higher salaries to attract new employees – no longer seem to apply.

One potential culprit, the report suggests, is the increased concentration of firms in a particular industry or geography, which reduces competition between hiring firms. This, alongside the increased prevalence of “no-poach” and “non-compete” agreements, the growth of outsourcing, globalisation and automation, is putting downward pressure on wages. In 2015, tech giants Adobe, Google, Apple and Intel agreed to a $500-million settlement for their part in an agreement not to poach each other’s software developers. These agreements stymied wage growth, the report says, because they limited employees’ ability to move and reduced their bargaining power.

Had these agreements not been in place it is estimated that the 64,000 affected workers would have earned an additional $3-billion, almost $50,000 per worker, over the life of the agreement. Ironically, by restricting employees’ mobility and prospects through the use of non-competes, employers are curtailing the spread of entrepreneurship and innovation – in the process indirectly harming themselves.

Automation and globalisation are also affecting wage growth. Work by the International Monetary Fund suggests that in advanced countries 50% of the decline in labour’s share of the profit (which is linked to stagnation) can be attributed to technology and 50% to globalisation.

In recent years the cost of technology has fallen, while simultaneous technology improvements have made routine, and increasingly non-routine, tasks vulnerable to automation. According to the research, for every extra robot deployed per 1,000 employees, wages are reduced by between 0.25% and 5%.

While concentration, automation and globalisation partially explain wage stagnation, there is another factor at play, which has to do with the difference between unemployment and underemployment. The unemployed are those who don’t have work and are actively seeking work, while the underemployed have work and are willing to work more hours than they do.

The report suggests they are willing to do so at the prevailing wage, which also puts downward pressure on the wage rate as the employer does not need to hire externally at a higher wage. Recent research has found that, since the 2008 recession, underemployment has become a better predictor of real wage growth than unemployment. And in parts of the world, like Europe, while unemployment has fallen, underemployment has risen.

Meanwhile, other trends identified in previous years persist. While unemployment may be at a multi-year low, companies are still battling to find the people they really want. The researchers have dubbed this a “talent mismatch” in which available skills do not fit available vacancies.

It is easy to see how this happened. Technology development is accelerating and the world wants more AI, machine learning specialists, data scientists and skilled IT professionals than it is currently producing.

It is no surprise the gender pay disparity will linger into 2020 and beyond. What is alarming is that emerging research suggests that female-dominated careers appear more susceptible to automation and globalisation. Change is the only constant and in the world of work the rapid growth of technology and automation, the rise of outsourcing, globalisation and uncompetitive labour markets are forcing governments and individuals to reassess the skills they have, and the skills they need. BM