Home' Trinidad and Tobago Guardian : September 11th 2014 Contents BG22 THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt SEPTEMBER 2014 • WEEK TWO
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Central bankers once used to inveigh
against wage inflation. Guarding against
a return to the ruinous price-wage spi-
rals of the 1970s was a constant pre-
occupation. Since the financial crisis,
however, they have started to fret about
the opposite concern: stagnant wages and the growing
risk of deflation.
There has been a squeeze on pay in the rich world
for several years now. Between 2010 and 2013 real
(inflation-adjusted) wages were flat across the Organ-
ization for Economic Cooperation and Development,
according to its annual "Employment Outlook," pub-
lished September 3.
Real wages have barely grown at all in the United
States over that period and have fallen in the euro area
and Japan. Declines have been particularly sharp in
the troubled peripheral economies of the eurozone,
such as Portugal and Spain, but real wages have also
tumbled in Britain.
These sharp adjustments have hurt, but were in
large part unavoidable. Real wages can grow in the
long run only at the pace of productivity. If productivity
has deteriorated, as for example in Britain since 2007,
real wages must fall. The crisis-hit countries of the
euro area, meanwhile, needed to lower labour costs
to reverse their loss of competitiveness relative to their
northern neighbors (the currency union makes the
more common form of adjustment, a devaluation,
In most advanced countries---though not in Britain
or Italy---labour productivity is picking up again. More-
over, the downward pressure on wages from high
unemployment is easing in some countries, including
the United States and Britain (in the euro area, alas,
the jobless rate is still 11.5 per cent).
Yet, even though unemployment in America has
dropped from a peak of 10 per cent in late 2009 to
6.2 per cent, growth in even nominal wages (that is,
not adjusted for inflation) is tame. In the private sector,
they had been rising by around 3.5 per cent a year
before the crisis, but are currently increasing by less
than 2.0 per cent a year. In Britain, where unemploy-
ment has fallen from a peak of 8.4 per cent to 6.4 per
cent, nominal pay is growing by 0.6 per cent a year,
far below the pre-crisis average of 4.0 per cent.
Divergent trends in the supply of labour help to
explain why the pay squeeze has been more intense
in Britain than in America. The British labor partic-
ipation rate--- the proportion of adults who are either
in work or looking for jobs---has returned to its previous
peak of almost 64 per cent and looks set to rise further.
By contrast, America s participation rate has declined
by 3.0 percentage points since the financial crisis and
is now bumping along at around 63 per cent.
Working out to what extent the low participation
rate is structural, meaning that it will persist, rather
than cyclical, caused by a weaker-than-usual recovery,
will be crucial in determining when the Federal Reserve
raises interest rates.
The Fed has seen quiescent nominal wages as evi-
dence the labor market has more slack than falling
unemployment suggests. But Janet Yellen, its chairman,
recently said that the weakness in wages might be
New research by the San Francisco Fed suggests
that many employers froze pay during the recession
because workers resist cuts in nominal pay more fiercely
than the erosion of their purchasing power by inflation.
Employers, unable to reduce wages when times were
bad, have not been raising them now that times are
better. But once this "pent-up wage deflation" has
run its course, pay growth might take off.
Such a rebound may occur outside the United States,
too, since there has been a widespread---although by
no means universal---reluctance to cut nominal wages
across the OECD, according to this week s report.
Between 2007 and 2010 there was a big jump in the
share of workers whose wages remained flat in nominal
terms. In Spain, for instance, the proportion of full-
time workers having to accept pay freezes rose from
3.0 per cent in 2008 to 22 per cent in 2012.
Weak Japanese wages are worrying Haruhiko Kuroda,
who as governor of the Bank of Japan is in charge of
his country s latest attempt to vanquish deflation. A
new programme of quantitative easing---creating money
to buy bonds---has been more successful than
previous, halfhearted attempts to get prices
rising again, but wages have remained slug-
gish. Although cash earnings jumped by 2.6
per cent in the year to July this largely reflected
bigger bonuses; regular pay rose by only 0.7
per cent, well below the newly revived level
of inflation. Kuroda recently said that a "vis-
ible hand" was needed to coordinate higher
Such a solution smacks of desperation but
it might work in Japan, which retains its cur-
rency. It would not make sense for the euro
area, the other big economy where deflation
remains a risk. Prices rose by just 0.3 per
cent in the year to August, but in a currency
club it is vital to allow wages to rise and fall
freely to provide the internal equivalent of
fluctuating exchange rates.
If wages in Germany rise, the downward
adjustment in less competitive economies in
the eurozone need not be so severe. That is
why Jens Weidmann, the head of Germany s
central bank, has been calling for higher pay;
a daring step in a country of inflation hawks.
The European Central Bank, which cut inter-
est rates this week, could also act more boldly
to raise inflation toward its target of almost
2.0 per cent. That would allow the eurozone s
invalids to regain competitiveness through
wage freezes rather than outright cuts.
Wages, of course, are not just important
to central bankers. Weak pay saps revenue
from income tax and social-security contri-
butions, making it harder for governments
to mend public finances. The lack of growth
in real wages hurts household finances, too,
keeping consumers tightfisted. A healthy and
sustained recovery in the rich world will
remain elusive until the pay squeeze ends.
@2014 The Economist Newspaper Ltd. Dis-
tributed by the New York Times Syndicate
The big freeze
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