Not Just the U.S., but the Whole World Needs a Pay Raise

 | Jul 07, 2017 | 9:15 AM EDT
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European stock markets pared back some of their losses after the U.S. nonfarm payrolls report for June handily beat expectations, coming in at 222,000 versus the consensus estimate of 179,000. But one detail in that data is still disappointing. Wage increases were just 2.5% year on year in June, and if we look at the monthly figure, that's up just 0.1%.

Wages are watched keenly because a strong pickup in people's income would mean more buying power, which in turn would push consumer prices up -- something the Federal Reserve would like to see right now to justify its interest rate rises.

The belief that the business cycle is nearing its peak is getting more entrenched, and it partly could explain the recent selloff in global stock and bond markets. However, the weak pace of wage increases, not just in the U.S. but in the rest of the world, seems to suggest the developed world is still far from overheating.

Take Japan, for instance. It boasted wage increases of 0.1% in May after salaries remained unchanged in April. Still, this was better than expected: analysts were forecasting an actual fall of about 0.1%, according to FactSet.

In Europe, the data from Eurostat paint a gloomy picture as well. The most recent data for all countries for the first quarter of this year show that in euro-area wages increased by just 1.4% per hour worked compared to the same period of last year.

Looking at individual countries, wages actually fell by 0.6% in the eurozone's largest economy, Germany, compared with the first quarter of last year. In France, the second-largest economy, wages increased by 1.7%, but in Italy, the third-largest economy, they fell by 0.2%, and in Spain, the fourth-largest economy of the single currency area, they dove by 3.5% despite falling unemployment. Netherlands, the fifth-largest eurozone economy, saw a 3% drop in wages in the first quarter, too.

One quarter definitely does not make a trend, and wages have been increasing strongly in smaller countries of the eurozone. They were up 3.1% in Portugal, for instance. The Baltic states -- recent euro members that are still developing economies -- posted the strongest wage rises in the single currency, with Lithuania showing a 5.5% jump, followed by Latvia with a 4.9% increase and Estonia with a 4.4% rise.

In the rest of the European Union, it was the emerging markets that saw big wage increases as well. Workers in Romania, the second-poorest EU state, saw the biggest wage increases, of 15.1% in the first quarter. They were followed by employees in poorest EU member Bulgaria, who saw their wages jump by 10%.

The U.K., where salaries were growing at faster paces than elsewhere in the EU, has been lukewarm as well: In the first quarter of 2017, wages rose by 1.7% compared with the same period last year after rising by 1.9% in the fourth quarter of 2016.

These figures seem to suggest that there is still plenty of slack in developed economies. In an optimistic scenario, the fact that wages are not increasing strongly should encourage central banks to temper their tightening stance, which would be enough to calm the investors' frayed nerves.

But there is a pessimistic -- or, perhaps, realistic -- scenario, under which wages will remain sluggish in the developed world. With robots taking over swaths of jobs previously done by humans and innovations such as smartphones disrupting sectors from technology to media, workers' negotiating power will keep diminishing as employment opportunities shrink.

Political factors are at play too, especially in Europe. Older workers are generally more protected, enjoying so-called "permanent" contracts (unless they have the misfortune of losing their jobs, in which case they find it almost impossible to work again). This situation has pushed firms to offer precarious, part-time contracts to a lot of the younger workers they hired after the financial crisis, which created a two-tier labor force.

As older workers retire and younger ones are resigned to their precarious state because it's all they know, companies no longer will want to revert to full-time, permanent types of contracts. And why should they? With a flexible workforce willing to work for less money, the earnings of businesses increase.

But as wage rises remain paltry, domestic consumption will be sluggish, too, and a slowdown would follow. Therefore, central banks don't need to tighten monetary policy to cool down the economies; companies' wage policies are doing that for them. The world needs a pay rise, or it will sink into recession sooner rather than later.

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