Economic growth refers to an increase in the production rate of economic goods and services. Usually, it is calculated in comparison with the preceding period. However, economists can also determine the economic growth from one period to another.
The primary unit to measure this growth is the GNP (Gross National Product). It includes the sum of various items that contribute to the production of goods and services.
On top of that, the GNP also deducts any items that do not come from within a nation. For example, it does not contain income earned by foreign residents within the domestic economy. Instead, it consists of several crucial factors.
These may include private domestic investment, government expenditure, and net exports. Each of these items contributes to the production of goods and services in an economy.
One of the factors that contribute to economic growth is the income made by its local residents. These residents may earn through various sources, one of which includes wages.
Wage growth is also a vital part of economic growth and a primary indication of it. However, this growth has been slow in many economies. Before discussing the reasons for the slow growth of wages, it is crucial to understand wage growth.
What is Wage Growth?
Wage growth refers to the increase in wages adjusted for inflation. Usually, it comes as a percentage based on the preceding period. Like economic growth, wage growth occurs from one period to another.
It is one of the primary indications of economic growth in the long run. Since wage growth affects consumer purchasing power, it impacts the development of an economy. On top of that, it also influences the level of living standards within an economy.
If the wage growth in an economy increases, it implies price inflation within that economy. However, a decrease can have the opposite effect. In those cases, governments may need to intervene in the economy through artificial methods.
There are several fiscal policies that they can use to influence wage growth. One of those includes minimum wage rates. However, governments may also choose not to intervene at all.
Several factors can impact wage growth within an economy. One of the most crucial factors includes productivity. For example, the higher the productivity in an economy is, the more demand for the labor will increase.
Consequently, the wage growth in that economy will also experience an increase. On top of that, productivity per worker is also crucial in stimulating price inflation.
Economists can calculate wage growth in various ways. It often includes using a producer or consumer perspective to the equation. Essentially, the producer perspective estimates labor costs relative to output price.
On the other hand, the consumer’s perspective calculates the wage associated with market prices. Each of these can help economists determine the wage growth for an economy.
Overall, wage growth refers to an increase in wages in an economy adjusted for inflation. It plays a significant role in the economic growth of nations.
However, this role is indirect by increasing consumer purchasing power and living standards level. Lately, most countries have suffered from the slow growth of wages. In some cases, governments have intervened to increase it artificially.
What are the Reasons for the Slow Growth of Wages?
Wage growth plays a significant role in any economy. However, most workers have complained of the slow growth of wages in the past few years. As stated above, several factors can contribute to the wage growth rate in an economy.
These factors may differ from one nation to another. However, they can explain why wages are growing slowly in those economies.
The top 7 reasons for the slow growth of wages include the following.
Labour productivity levels have lowered
As mentioned above, productivity is one of the most crucial factors in determining wage growth. It is also one of the reasons for the slow growth of wages in many economies. Labour productivity has grown very insignificantly over the last few decades.
This growth does not justify an increase in wage growth for a nation. Since there is no benefit in increasing wages in productivity terms, wage growth has also been slow.
Employers are providing benefits
Wage growth only calculates the difference between payments for several periods. However, it fails to consider the benefits offered by employers. Most employers have changed their focus from offering higher salaries to providing better benefits.
These include items such as health insurance, retirement contributions, etc. Essentially, employees are receiving higher compensation for their work. However, it does not reflect on their wages.
Employers are focusing on decreasing costs
Most employers include companies and businesses that focus on profitability. For these employers, lowering the costs from operations is highly crucial.
Consequently, they have declined their expenses in various areas, including labor. Most companies have decreased the wages offered to employees. Due to this decrease, the wage growth in economies has also slowed. In most countries, it is one of the crucial factors contributing to slower growth.
Availability of more inexpensive labour
Many nations have experienced an influx of migrants from other countries. These people constitute the potential workforce available for hire.
Usually, they are willing to work for much lower prices than the workers available in the market. Consequently, companies have found a cheaper alternative to most tasks within their operations. This availability of more expensive options has also slowed the growth of wages in various nations.
Unemployment rates haven’t decreased
Unemployment is one of the most crucial contributing factors to the slow growth of wages in many nations. Essentially, it has increased the supply of labor in many markets.
However, the demand has stayed the same. Unemployment creates a similar issue to some other factors on this list. It increases the power that employers have. Usually, it provides access to cheaper alternatives, which slow the growth of wages.
The bargaining power of employees has decreased
In the past, employees had more leverage in contract negotiations. The demand then was high, while supply came in a limited quantity.
Similarly, employees were a part of unions, which gave them more leverage against employers. However, both of these factors are not applicable in the current era. Most employees do not have the same power to bargain with employers. It is one of the contributing factors to the slow growth of wages.
The labour market has changed
The labor market isn’t the same as it was in the past. Back then, employees looked for permanent jobs and stayed within those roles for years.
Nowadays, the labor market offers more temporary and part-time workers. On top of that, zero-hour contracts have also become prevalent in the current era. These factors have contributed to the slow growth of wages compared to the past.
How to fix the slow growth of wages?
Wage growth still occurs. However, it is not at the same level as it used to be in the past. As stated above, several reasons have contributed to this change over time. Some of these factors are uncontrollable, while others can have some solutions. Some governments have worked toward fixing the slow growth of wages through artificial interference.
Economists have various solutions for fixing the slow growth of wages in nations. Some of the most recommended approaches include the following.
- Cut taxes to boost aggregate demand.
- Implement measures to boost business investments.
- Maintain high government spending to boost aggregate demand.
- Reform industrial relations to increase the use of enterprise bargaining.
- Reform industrial relations to support higher wage decisions by the government.
- Retrain growth in labour supply by restricting migration.
- Take measures to boost productivity growth.
Economic growth is highly crucial for nations to grow. One of the contributing factors to this growth is wage growth. However, most workers complain that it has slowed down over the years. Several factors can contribute to the slow growth of wages. Despite that, there are various ways to fix it, as mentioned above.