OECD offices, Paris. Photo: OECD/Michael Dean
A glimmer of sanity? The new OECD Employment Outlook on wages, hardship and deficient demand
Ever since the crisis the stern mantra of policymakers has been that countries must improve ‘competitiveness’. The onus was therefore on the victims of the crisis to take even more punishment in the form of wage cuts. On a certain view, with investment falling and given the imposition of cuts in government demand, a reduction in wages (and hence household demand) would seem like the last thing countries would need.
In the wake of the consequent and entirely predictable concerns about deflation, the latest Employment Outlook betrays some welcome backtracking on the part of the OECD. (Though the word deflation occurs only once in their report.)
In Chapter Two, ‘sharing the pain equally? Wage adjustments during the crisis and recovery’, the OECD recognise both fairness and macroeconomic concerns:
- “wages also provide the dominant source of income for households and stagnant or falling real wages tend to be associated with economic hardship, especially for the most disadvantaged”.
- “Reductions in earnings also reduce consumer spending and dampen aggregate demand” [my emphasis].
In the ‘key findings’ section, the OECD catalogue the extent of these wage adjustments, and the resultant ‘severe hardship for low-paid workers’. ‘The United Kingdom’ frequently recurs in this litany of hardship. Their figures below shows UK earnings growth third from bottom of all OECD countries.
Average annual real wage growth, per cent, 2007 to 2013
Source: OECD statistical appendix table M
In what a colleague described as ‘classic two handed economist stuff’, the OECD also defends its past position by maintaining that
Thus, while cuts in earnings have contributed to hardship and social distress in a number of countries, they have also played an important role in restoring external competitiveness, rebalancing current accounts and promoting external demand (even if potentially at the cost of curbing domestic demand).
But the balance has clearly changed, and they now say that ‘further adjustments based on wage cuts may be difficult to achieve. Instead policy attention needs to focus elsewhere’.
Then the tantalizing statement: “Macroeconomic policies have an important role to play”. But this is left up in the air, and instead various tired structural reforms enhancing the operation of product and labour markets are detailed. Whether these actions will resolve the shortfall in domestic demand that the OECD implicitly acknowledge is more doubtful. But there is here a glimmer of sanity.