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1. Global wages convergence

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1. Average wage evolution in the long-term since the 1950s/1960s

The big reversal in the 1980s (advanced countries/emerging countries)

Labour markets may be regional or global in some types of activity, but the most frequent case is a national labour markets, influenced mainly by the “average” world market and secondarily by the surrounding national markets or in connection, according to skill levels.

 

General evolution in the long-term since the 1950s

In advanced economies, a rapid wage growth can be observed until 1980, then a slower movement from 1980 through today. Between 1950 and 1980, wages in advanced economies have grown faster than those of the emerging countries. The situation is reversed in the 1980s: wages in emerging countries grow faster than those of developed countries (example in Fig. 1).

On the macroeconomic level, from 1945 till approximately 1980, growth and wage income increase quickly in Europe and North America and more slowly on the other continents. For example, GDP in Europe increased by 5% per year and wages by 4%, while India’s GDP grew by 3 % a year and the average wage a little less. From the 1980s, the situation was reversed: growth and wages rose faster in emerging countries such as India, Brazil, China or South Africa. European GDP increased by less than 2% from 1980 and wages by about 1% per year; India’s GDP increased by 6% per year and the wage by 4%.

Among the many biases that can disrupt the comparison between growth and wage bill is the evolution of the labour force in each state. Also, the demographics have deeply changed[1]. Europe has e. g. risen from 400 million inhabitants in 1950 to 500 million today, so from 16% of the world population to 8 %. Its GDP increased from 30% of world GDP in 1950 to 20% today. As of now, three so called emergent countries (India, China, Brazil) represent 40% of the global population and their share of the world GDP has risen from less than 10 % in 1950 to just over 20% today, which is equivalent to is the production of Europe or that of the United States.

 

Since 1995, global wages increased around 2% per year and GDP of around 3.5-4%

From 1995, the ILO has better statistics on a global scale, sufficiently homogeneous to allow for acceptable comparisons.

Global GDP has been growing since 1995 at between 3.5 to 3.8% per year. In comparison, it can be seen that average wages have risen at about half that rate (2%) on average with a significant difference between:

- Advanced countries: 1%

- Emerging countries: 3-5% (with a lot of heterogeneous situations), for instance China: between 5 and 8%, or India and Brazil: around 3%

(ILO, Global Wage Reports, passim, 2008-2017)

PresentationFig1ENG

 

Mean and variance

Concerning wage issues, the mean is widely used to make comparisons between countries and over time, but it can be seen very quickly that dispersion is the rule.

The graphs below show dispersion phenomena between subsets of countries classified by standard of living (Figure 2), between advanced and emerging countries (Figure 3) and within the subgroup of emerging countries (Figure 4).

In purchasing power parity (PPP), with an average gross monthly wage of $1.500 in 2012, the inhabitants of advanced countries receive twice as much, those of the major emerging countries by two thirds, those of the other developing countries by a small third (Fig. 2).

PresentationFig2ENG

 

While the gap (PPP) between the wealthiest in advanced economies ($3.000) and emerging low-wage countries ($200-400) remains considerable (from 1 to 10) as shown in Figure 3, the gap between the different emerging countries themselves also appears important (from 1 to 9), between the most advanced ($1.800) and the least advantaged ($200), as can be seen in Figure 4.

 

PresentationFig4ENG

Comparison developed / emerging countries: methodology

In these comparisons, it is necessary to exceed the arithmetic ratios and to take account of several socio-economic, political and cultural factors which relativize or influence distortions. We can observe in emerging and developing countries:

  • A large share of agricultural workers, involving generally lower wages
  • The importance of the informal and family economy, poorly recorded (under-monetized, under-taxed)
  • A high rate of working poor (more than employees) in the vicinity of the minimum wage
  • The significant difference between men and women: less cultural enhancement of women and girls
  • The relative lack of Welfare state and social insurance

 

2. Convergence hypothesis: trend to price equalization of wage labour through international trade

The trend to price equalization of wage labour has spread through international trade and globalization (HOS Theorem, Heckscher-Ohlin-Samuelson, 1919-1933-1941, taking into account its limitations). This equalization of relative and absolute income of factors should appear between nations, according to the skill level: wage equalization for engineers, for middle staff, for workers, for all countries that trade together[2]. An equalization in income of homogeneous capital (with same capital productivity and same risk) can also been observed for all countries that trade. The expansion of trade, having equalized factor incomes, will during its development tend to equalize the relative factor prices and absolute prices. All this is checked if all assumptions hold[3].

The ILO observes this slow convergence (Fig. 5): each point on the curve represents the average wage of a country. We observe that the 2012 curve has shifted to the right in relation to 2000, mainly due to the rise of emerging countries - even if the weight of China tends to exaggerate this phenomenon

PresentationFig5ENG

 

The empirical verification of the HOS assumptions regarding relative prices gives composite results because the model assumptions, such as those of perfect competition are rarely met in the real world. The theorem gives a trend, but the finding of its applicability is hampered by differences in technology, taxation, organization of the labour market or transport costs, customs duties or non-tariff barriers, imperfect competition and labour market viscosities, several kinds of corporatism etc.

 

Conclusion

Differences remain very important between countries and within continents, wage differential and migrations’ potential

Why the persistence of large wage differentials on a global scale and within continents?

The “labour market” is not comparable to currencies, commodities or information markets and is segmented by sociocultural effects and national specificities (language, labour law, social insurance). The slow filling of gaps between countries is partly due to the specifics of the labour market:

  • Many labour markets remain national: spoken language, different social and fiscal rights, non-explicit norms (habits), trade union action
  • The mobility of labour is much lower than that of capital: familial, social networks, rooting of assets (real estate, education of children)
  • A number of subsets remain protected: salaried officials, regulated professions etc.

 

Wages and migrations

The question of convergence is directly related to that of migratory movements in which the wage differential plays a certain role (even if it is neither unique nor necessarily decisive).

For instance, the Mediterranean is the contact area of the world, where wages contrasts are almost at the highest (1 to 8 Nominal between Maghreb and France, 1 to 4 PPP for example).

A more differentiated calculation of gaps between countries, gender, sectors etc. can be carried out. We have, for example, studies in Morocco on the motivations of emigrants, their aspiring financial strategy, their minimizing of social risks induced by migration (migrant decommissioning effect in the country of arrival).



[1] The European Union accounts for about 160 million wage earners out of an active population of 200 million and the globe between 1.2 and 1.5 billion wage earners out of 2.5 to 3 billion.

[2] Wolfgang Stolper, Paul Samuelson, “Protection and Real Wages”, Review of Economic Studies, IX, November 1941, p. 58-67. The Heckscher-Ohlin theory (1919-1933) marks the starting point of the contemporary analysis of international trade, based on the HO theorem predicts the processes and the exchange structure. In 1941, Paul Samuelson and Wolfgang Stolper have deduced from H-O another theorem on the remuneration of factors, which was systematically incorporated into the presentation of the model, now known as HOS-model

[3] E.g.: Dominick Salvatore, International Economics, New York, John Wiley & Sons, Inc. 2007, chapter 5.

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30-31 October 2017

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