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WAGES AND LABOUR PRODUCTIVITY ACROSS DEVELOPED ECONOMIES 1999 - 2013 Kristen Sobeck ILO Source: ILO Global Wage Report 2014/15. LABOUR PRODUCTIVIT Y HAS OUTSTRIPPED WAGE GROW TH Source: ILO Global Wage Report 2014/15. WHY IS THIS IMPORTANT? Presents macroeconomic implications for aggregate demand and economic growth. Decoupling has occurred in a context of increasing inequality, and a decline in the bargaining power of workers. Speaks to the distribution of wealth in society and the consequences and the policy implications. LABOUR PRODUCTIVIT Y HAS OUTSTRIPPED WAGE AND COMPENSATION GROW TH Source: ILO Global Wage Report 2014/15. MEASUREMENT DEBATE: WAGES VERSUS COMPENSATION Wages (earnings) = direct wages and salaries for time worked (in cash and in-kind) + remuneration for time not worked (holidays, vacations) + bonuses and gratuities PLUS Social insurance contributions payable by employers which include contributions to social security schemes; actual social contributions to other employment-related social insurance schemes; and imputed social contributions to other employment -related social insurance schemes. EQUALS Compensation of employees MEASUREMENT DEBATE: CPI VERSUS GDP DEFLATOR The Consumer Price Index (CPI) measures changes in the prices of goods and services that households consume. They are intended to capture price inflation perceived by households and changes in the cost of living. Wages and compensation deflated by the CPI reflect changes in the purchasing power of workers’ wages. GDP deflator measures changes in the prices of goods produced in the domestic economy (not just those consumed by households). Since labour productivity is calculated from real GDP (which is deflated by the GDP deflator), using the GDP deflator to deflate wages and compensation eliminates variability in deflators as a factor which may drive the final results. THE DEFLATOR CHANGES THE RELATIONSHIP Wage & Compensation / CPI 120 Australia 110 LP 90 100 Wage & Compensation / GDP deflator 2000 2005 2010 year wage_index comp_indexCPI lp_index wage_index_GDPrebase comp_indexGDP wageshare_index 2015 THE CONCEPT (WAGES VS. COMPENSATION) CHANGES THE RELATIONSHIP 100 105 110 115 120 125 United Kingdom Compensation/ CPI & GDP deflator LP Wage/ CPI & GDP deflator 2000 2005 2010 year wage_index comp_indexCPI lp_index wage_index_GDPrebase comp_indexGDP wageshare_index 2015 THE RELATIONSHIP DEPENDS ON BOTH CONCEPTS 115 Canada 110 Compensation / CPI LP LP 95 100 105 Wage /CPI & GDP deflator AND Compensation /GDP deflator 2000 2005 2010 year wage_index comp_indexCPI lp_index wage_index_GDPrebase comp_indexGDP wageshare_index 2015 MEASUREMENT IS IRRELEVANT 130 United States 120 LP 90 100 110 Wage & Compensation/ CPI & GDP deflator 2000 2005 2010 year wage_index comp_indexCPI lp_index wage_index_GDPrebase comp_indexGDP wageshare_index 2015 MEASUREMENT CAN MATTER 12 11 10 Number of developed economies 10 8 8 6 4 4 2 0 Deflator Concept Both (concept & deflator) Neither IN COUNTRIES WHERE A TREND CAN BE IDENTIFIED, LABOUR PRODUCTIVIT Y GREW FASTER THAN WAGES OR COMPENSATION Wages or compensation grew more than labour productivity Labour productivity grew more than wages or compensation 12 Number of developed countries 10 6 8 6 7 4 5 2 2 0 Both (concept & deflator) Neither ARE TRENDS IN WAGES AND LABOUR PRODUCTIVIT Y CONSISTENT WITH THE LABOUR INCOME SHARE? Since wages are dif ferent from compensation, the link between wages and labour productivity could dif fer from trends in the labour income share. Labour income share - unadjusted= Compensation of employees GVA/GDP In most countries, the relationship between wages (deflated by the GDP deflator) and labour productivity is a reasonable proxy for trends in the labour income share. In the few countries where trends in wages (deflated by the GDP deflator) and labour productivity are inconsistent with the labour income share, the discrepancies are explained by a combination of dif ferences in: data coverage, series breaks, estimates for missing data, provisional data, and improvements in data over time. CONCLUSIONS In about half of developed economies, the relationship between wages, compensation and labour productivity depends on the concept and deflator used. In the other half, measurement doesn’t matter, or only matters for one combination among the concept -deflator combinations. Although wages are dif ferent from compensation by definition, the relationship between wages and labour productivity is a reasonable proxy for trends in the labour income share in developed economies.