Slow wage growth may be permanent, says the IMF

A rise in part-time work is to blame for slow wage growth and the change may be permanent, warns the IMF.

Changes in the nature of work and employment relations may stem the move from manufacturing to services industries, says the IMF

Wage growth may never recover to its level before the financial crisis because the structure of the labour market has changed, the International Monetary Fund claimed.

Across the developed world, pay is rising more slowly than before 2008 even though unemployment in many countries is lower.

The IMF said that higher levels of “involuntary part-time employment” were partly to blame and that the change may be permanent.

The fund’s work is a response to one of the more troubling post-crisis economic puzzles. Unemployment has fallen below 2008 levels in Britain, Germany, Japan and America, four of the world’s five largest economies, yet pay “remains markedly lower”.

In the UK, unemployment is at a 42-year low of 4.3 per cent but wages are growing at only 2.1 per cent, less than half the 4.25 per cent annual average in the decade to 2007.

Weak productivity across advanced economies since the crisis explains a lot, as companies have been unable to generate the internal efficiencies to lift pay while protecting profits, but structural shifts have also been influential.

“In economies where unemployment rates are below their averages before the great recession, slow productivity growth can account for about two thirds of the slowdown in nominal wage growth since 2007,” the IMF said before its annual meetings next month.

“However, even here, involuntary part-time employment appears to be weighing on wage growth, suggesting greater slack in the labour market than captured by headline unemployment rates.

“Subdued wage growth has generally coincided with a reduction in hours per worker and, in some cases, a higher rate of involuntary part-time employment and an increased share of temporary employment contracts.”

In the UK, part-time and self-employed work accounted for half the 2.5 million jobs created since 2008 and 880,000 Britons are on zero-hours contracts, defined as temporary by the IMF. The rise in precarious work has coincided with an increase in involuntary part time.

Since the crisis, the proportion of workers wanting more hours rose from 2.4 per cent to 3.9 per cent in the UK, 0.8 per cent to 1.3 per cent in the US and 5.3 per cent to 7.8 per cent in France. Temporary contracts are “more common now than in 2000-07 for most advanced economies,” it added. “Some of these developments point to a persistent shift in the nature of work and employment relations.”

The change may be a product of the move from manufacturing to services industries, it added.

Standard supply and demand theory suggests that as long as existing workers want more hours, employers will not come under pressure to raise pay.

Policymakers may need to respond to the modern world of work with “efforts to address the vulnerabilities that part-time workers face”.

The IMF proposed more skills training schemes and broadening minimum wage coverage and employee benefits to part-time and self-employed workers. The proposals effectively endorse recommendations from the British government’s Taylor Review this year.

“The rise of part-time employment and temporary contracts challenges the current structure of social insurance systems” that only distinguish between employed and unemployed, it said.

The Times