Wage Inequality Is a Global Challenge

The International Labour Office’s most recent report on wages shows why there is a global social, political, and economic imperative to combat wage inequality, writes Sabina Dewan.

Workers work on assembly line of shoes at Thuong Dinh Shoe factory in Hanoi, Vietnam, which produces shoes for domestic markets and for exports. (AP/Chitose Suzuki)
Workers work on assembly line of shoes at Thuong Dinh Shoe factory in Hanoi, Vietnam, which produces shoes for domestic markets and for exports. (AP/Chitose Suzuki)

The issue of fairness is a cornerstone of President-elect Obama’s policy prescriptions for the U.S. economy. Today there is consensus that globalization, which characterized by trade liberalization, an expansion of foreign direct investment, massive cross-border capital flows, and shifts in information flows, is a mixed bag for U.S. workers and for workers around the world. Globalization yields unbalanced outcomes that manifest themselves in wage inequality and job vulnerability. Distribution of the benefits of globalization is anything but fair.

A new report published today by the International Labour Office confirms these observations not just for U.S. workers, but for workers in 83 countries around the globe, representing approximately 70 percent of the world’s population. The study, entitled “Global Wage Report 2008/09,” finds that since 1995 inequality between the highest and lowest wages has increased in more than two-thirds of the countries for which there is data. The United States is one of the advanced countries in which the gap between the highest and the lowest wages has grown most rapidly, but other nations with similar wage gaps include Germany and Poland. Inequality has also increased sharply in Argentina, Thailand, and China.

In addition to rising inequality among wage earners, the ILO study found that over the same period, the share of gross domestic product distributed to wages declined, and the wage gap between women and men closed only slightly.

During periods of economic expansion, wage growth lagged behind economic growth. Over the entire period of 1995-2007, each additional percent in annual growth of GDP per capita stimulated only a 0.75 percent rise in the annual growth of wages on average, according to the ILO study. This indicates that increases in productivity have not translated into higher wages. During periods of economic downturns, however, wage growth responded by slowing down more quickly. A 1 percent decline in GDP growth per capita, for example, resulted in wages dropping by 1.55 percentage points, according to the ILO study.

These unequal wage trends do not bode well for the millions of workers across the globe that are likely to see their wages erode as a result of a troubled global economy. Indeed, wages in 2009 are expected to decline by approximately 0.5 percent in industrialized countries and grow by a meager 1.1 percent globally. Amid this somber forecast, the ILO report does find that collective bargaining and minimum wages can improve wage outcomes.

Declining wages and rising inequalities across the globe—exacerbated by the current economic crisis—present two very different problems for the United States. First, high levels of inequality around the globe could lead to adverse social, economic, and political consequences that can be destabilizing and could lead to social unrest and insecurity especially in undemocratic, or weakly democratic, countries. At a time when the United States most needs to re-engage with the global community to address challenges ranging from terrorism to climate change, instability in key nations such as China and Pakistan, and the fragile democracies of Latin America, could prove a real threat to national security.

Second, declining wages mean a decrease in global purchasing power and a slow down of global consumption at a time when the wheels of the world’s economic engine are already grinding to a halt. This means U.S. products and services will find fewer buyers abroad, and foreign goods and services will find fewer buyers here. This vicious cycle of falling wages and consumption can be reversed by policies that foster wage increases and reduce inequality in a sustainable way. That’s why it’s imperative to take appropriate measures to ensure that the rising tide does, in fact, lift all boats. Helping alleviate global inequalities, including wage inequalities, is essential for sustainable security and a strong world economy.

Here at the Center for American Progress we believe that a virtuous circle of economic growth that builds a growing global middle class can reduce the world’s reliance on the U.S. consumer to propel global economic growth. A clear and coherent strategic focus in trade, aid and monetary policies towards better economic governance with efficient and effective labor, consumer, investor, and social protections, can help ensure that the gains from economic integration are distributed more fairly.

Generating additional demand abroad for U.S. products and services will lead to improvements in living standards both here and abroad. Addressing rising inequality, of which wage inequality is a key component, is not only an ethical imperative, but also an economic and political one toward sustainable security, economic stability and prosperity for the United States and the world.

Sabina Dewan is Associate Director of International Economic Policy at the Center for American Progress. To read more about our economic policy prescriptions, please go to the Economy page of our website.

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Sabina Dewan

Senior Fellow