Why salaries and wages will remain stagnant forever?

Here’s the bad news for people working in jobs.

Salaries and wages will remain stagnant forever especially if employees and workers remain in their current jobs and don’t continuously upgrade themselves to constantly create new value and opportunities for their employers.

Global market forces for labour and advances in technology are suppressing salary and wage growth for most people.

The globalisation of labour markets and impacts of technology have drastically weakened any policy interventions implemented by governments all around the world to directly increase their citizen’s salaries and wages and interfere with market forces. Even countries with low unemployment cannot effectively increase their workers’ salaries and wages.

There are also just too many job seekers going after a decreasing number of job vacancies. People have no choice but to take on any lower-paying jobs that they can grab on to. There are just not enough quality paying jobs to go around – hence, employers are very selective in who they hire and pay big bucks to.

This mismatch or gap between what job seekers have and what employers are looking for is ever-increasing. Job seekers and young people in particular are and will face significant challenges to break into the job market.

While there may be exceptions, many people will not experience any real salary growth especially when inflation, low-interest rates, and the increasing cost of living and healthcare are factored into the equation.

Global economic uncertainty

Businesses are operating in a world of economic uncertainty. This will impact on how employees and workers get paid and are being managed.

The global economic uncertainty index as shown below is based on newspaper coverage frequency including human readings of 12,000 newspaper articles indicates that the uncertainty around the world has significantly increased. It is even higher than the period of the global financial crisis.

 

Additionally, according to data compiled by the OECD, the global volume of foreign direct investment (FDI) fell 20% in the first half of 2019 compared to the previous half-year period. This decline accelerated in the second quarter when global FDI was down more than 40% from the previous quarter.

Zombie companies, or corporate underachievers overdosed on cheap credit, are proliferating across the globe, threatening to derail the weakening world economy, as shown in the diagram below.

The number of global organisations that do not generate sufficient profits to cover their interest payments and survive only by repeatedly refinancing their loans has doubled in a decade. It is only readily available low-cost debt financing helps keep highly indebted, poor-performing organisations alive that would have otherwise gone under.

Low wages impact spending, businesses, and lifestyles

In 1964, $2.50 could buy quite a bit. Now, this average hourly wage can only buy a pack of sweets.

Dollar for dollar, the average American worker’s hourly wage has risen nearly 10 times since 1964 to $22.65.

 

But here’s the kicker.

Although wages have steadily risen, so too has the cost of living.

In fact, compared to their 1964 counterparts, Americans’ real hourly wages have only increased by $2.38 (10.5%). This is despite sustained gains in productivity across all major industries. It means that the average American worker doesn’t have more cash to spend on essential goods and services.

This situation has been repeated in many industrialised countries.

It is no surprise that a survey found that 25% of workers are seeking employment outside their current organisation because they want higher pay, as shown in the diagram below.

 

 

In a consumer economy, spending drives economic growth and increases the prosperity of businesses. The flow-on effect is a subdued economic growth, which is what a lot of countries are experiencing.

When real wages are stagnant, many consumers are going to either hold on to their money or look for the best deal possible. This could often mean turning to big businesses that leverage on economies of scale or lowering the retail price to the detriment of smaller businesses.

Why is this occurring?

Wage stagnation experienced over many years has been enabled by increasing global business competition, increasing population growth, technological advances, and an increasing number of educated job seekers.

Potentially, these same factors can reduce salaries and wages over time!

Governments all around the world can’t do much to interfere with global market forces and advances in technology by directly increasing salaries and wages. Instead, governments must create the right environment for businesses and individuals to be creative and find new ways of doing things to find growth and value.

Competitive business environment

Business shareholders and investors are demanding higher profits from their investments, while consumers are demanding lower-priced goods and services for them to open their wallets.

Sandwiched in between are employees and workers. They are squeezed both ways in terms of salaries and wages.

Businesses are expected to respond to their ever-changing competitive environment by balancing the requirements of their shareholders, customers, and employees want.

When customers don’t spend, businesses struggle to expand and pay their workers.

In our zeal for corporate profits and cheaper consumer goods and services, we are also turning a blind eye to the fact that an increasing number of workers such as Uber drivers and people delivering food on bikes are earning less than the minimum wage.

The income that drivers get after deducting Uber fees and driver vehicle expenses from passenger fares is an average $11.77 an hour, according to the Economic Policy Institute. This average Uber driver hourly compensation is substantially less than the $32.06 average hourly compensation of private-sector workers and less than the $14.99 average hourly compensation of workers in the lowest-paid major occupation (service occupation workers).

Our zeal for profits, and cheaper products and services

Customers want cheaper products and services. This, unfortunately, tends to perpetuate wage cuts or suppression, non-compliance with workplace laws, and wage theft.

Technology has enabled many of us to get cheaper products online in the comfort of our homes rather than driving to local shops.

This is where technology is disrupting how businesses operate around the world where geographical boundaries have been taken down. Everything is now global.

We see this by the growth of global retail e-commerce sales. According to Statista, in 2019, retail e-commerce sales worldwide amounted to 3.53 trillion US dollars. It is projected to grow to 6.54 trillion US dollars in 2022.

Over-regulation does not help

With the ever-increasing regulatory compliance cost added to the price of goods and services, penny-pinching customers will only gravitate to cheaper alternatives wherever they are sold.

Businesses, especially those serving international markets, are forced to survive by reducing compliance costs by perhaps intentionally breaching employment standards and minimum wage limits. Countries that have stricter laws will only drive commerce away from their people or companies operating locally in those countries.

If society is going to create minimum standards for employers to protect workers, it is vital to ensure that those standards cannot be evaded by sham arrangements that disguise employment as something else.

Employees have become sacrificial lambs

For decades, especially across many developed nations, businesses have been making money by cutting labour costs. This has become a key business strategy that appeals to both shareholders and consumers.

Payroll cost, being the largest cost component for any organisation, will always be the first to be cut or reduced. This means fewer workers in jobs.

Restructures and reorganisations are becoming so common that employees and workers have no job security and income certainty.

Just-in-time contracting will only increase

Businesses have been turning to just-in-time short-term time-limited contractors and freelancers over just-in-case on-going full-time employees to do their work.

Technology has opened Pandora’s Box by enabling businesses to hire any qualified workers they want, at the lowest possible cost, from anywhere in the world, and for a specific duration.

Technology has also enabled contractors to provide their services digitally from any global location. The marketplace has become global and governments cannot control or limit its impact on their local job markets. Local country laws are becoming useless and ineffective.

People are hired if they are willing to do work at a fraction of the cost, without minimum wages, legal protection, and employee entitlements and benefits. Market forces will dictate the price paid.

It’s a case of willing buyer, willing seller.

Freelancing platforms force prices down

These global contractors use global freelancing e-marketplaces or platforms to source for their contracting work and accept the stated price offered by businesses.

Technology has unfortunately allowed for transparent price comparisons to be made easily. Pricing transparency afforded by these platforms is keeping or even forcing prices down. When this occurs, it decreases or suppresses the incomes for many people.

Depending on how desperate these contractors are, prices can be set at very low rates. This is where work will gravitate to people living in lower-cost countries or who have the right skills and experience required by businesses.

Third-party labour-hire suppresses salaries and wages

Businesses have been using third-party labour-hire companies to constantly push down labour and compliance cost.

Without any direct employment relationship, businesses consider these workers as independent contractors supplied by labour-hire companies to do their work. There are no employment contracts to manage, no minimum wages to be paid, and no benefits and sick leave entitlements to worry about. They have transferred their risks.

People costs are kept low through aggressive negotiations and contracting. This has a positive flow-on effect on its profitability.

As many labour hire companies are not employers themselves, they will pay anyone willing to work at any cost, even at below minimum wages.

Even governments are freezing real wage increases for their public servants. What more for the private sector.

But cost-cutting may not be the answer

Generally, many organisations have responded to periods of economic distress with cost-cutting campaigns.

However, given the long-term, structural changes to many industries and business models, many cost-cutting campaigns are likely to yield limited returns unless they can fundamentally bend the slope of the cost growth curve.

To remain profitable amid this changing landscape, organisations will need to radically restructure their operations and find new operating markets.