Employment Rising in Developed Economies

Unemployment in the world’s biggest developed economies has been falling, at least since the end of the financial crisis. But wages, in the main, have not reacted as might be expected. They have generally either grown only modestly, or even fallen.

Take, for example, resurgent Germany. Since 2012, the unemployment rate has tumbled to the lowest level since reunification. Wages and salaries have grown—but only gradually and at nothing like a rate to imply pressure, Reuters reported.

It is even clearer in Japan, where unemployment this year has fallen to a more than 20-year low of just 2.8%. “Everything tells us the labor market is tight in Japan,” said Mark Williams, chief Asia economist at Capital Economics. “But the one place we are not seeing labor market tightness in is wages, which aren’t rising at all.”

One impact of this globally is that inflation has not picked up much despite the massive amount of stimulus hurled at it by central banks, including negligible or even negative interest rates. Indeed, it may be one reason why some banks appear to be less worried about low inflation than they were.

For the worker, the lack of inflation has masked some of the wage stagnation. (It has only become a hot issue in Britain, for example, since inflation took off after the Brexit vote.)

But this may not last. September’s GfK sentiment index suggested German consumer morale may be about to cool as a result of a more negative expectation for incomes.

 Labor Market

The more-workers-less-pay-growth phenomenon, meanwhile, is the subject of a new report from International Monetary Fund economists Gee Hee Hong, Zsoka Koczan, Weicheng Lian and Malhar Nabar.

They find the disconnect between unemployment and wages to be the result of a number of factors—including the slowdown of productivity—that are relatively new and which are probably not going to go away.

A key factor is an abundant workforce—labor market slack in the jargon. But that is a seeming contradiction given the record low unemployment rates in some places. It comes down to people working fewer hours than they would like and the trend towards temporary contracts—the gig economy, zero-hours contracts and so on.

That leaves a large number of workers for companies to choose from if wage demands rise. “Despite employment growth, hours per worker have continued to decline and involuntary part-time employment has increased in more than two-thirds of countries,” the IMF report notes.

A second factor is, in effect, the impact of globalization and a more integrated global economy.

“Playing a possible role is the threat of plant relocation across borders, or an increase in the effective worldwide supply of labor,” the economists found.

Interestingly, a third factor—automation—was not found by the IMF team to have had a major impact, at least yet. That may come later.

In March, PricewaterhouseCoopers, the world’s second largest professional services firm, consultants estimated that by 2030 automation will impact—do away with or change—38% of existing jobs in the United States, 35% in Germany, 30 in Britain, and 21 in Japan. Sounds a long time away, but it is just over 12 years.

 Italy Next

The political impact of all this is unknown—although Britain’s Brexit vote, the election of US President Donald Trump, and the rise of the far-right AfD in Germany all point at the very least to voter disenchantment with the status quo.

So the next big test could be Italy, where unemployment is a stubborn 11.4% and wage growth has been running at negligible year-on-year rates. Italy will have to hold a general election by the end of May next year and an economy deemed to be weak or unequal could boost support for parties that at the very least have been critical of the euro.

 Germany at Record Low

Unemployment in Germany hit a surprise new low in September, official data showed Friday, the latest in a string of sunny indicators as the upswing continues in Europe’s top economy, AFP reported.

The rate of people out of work fell to 5.6% this month, the Federal Labor Agency said, while analysts had expected the figure to hold steady at 5.7%.

The drop means unemployment has reached a new all-time low since German reunification in 1990. “The labor market continues to develop in a very positive way,” labor agency head Detlef Scheele said in a statement.