World population growth
The world’s population is expected to increase by two billion persons in the next 30 years, from 7.7 billion currently to 9.7 billion in 2050, according to the United Nations.
Employers can get and retain workers without offering significant wage increases because there are more jobless workers than available jobs. This helps businesses in keeping their costs low.
Dilution of negotiation power
When there are more job seekers wanting jobs, employers can pick and choose who they want to hire. They are willing to negotiate outside collective employment agreements and use third-party hire companies to get the right worker at the lowest possible cost.
Unionisation can lead to higher wages, lifting wages of low- and middle-wage workers than of high-wage workers. Collective bargaining can also lead to a larger share of corporate income going to wages rather than profits.
The fact that corporate profits are at historic highs is, unfortunately, a reflection, in part, of the current weakness of collective bargaining and the heightened power of corporate owners and managers.
The ability of workers to negotiate a better outcome has, therefore, been significantly diluted. Their bargaining position has been significantly weakened when there are people who want to do any job at the lowest cost, even with sub-optimal work conditions and employee benefits.
Desperate job seekers undercut
People who are prepared to lower their income expectations and undercut other job seekers will more likely get the job.
Global market forces are dictating how much employers are willing to pay their workers and there is really nothing governments can do to protect these cross-border influences or impose higher minimum wages for the benefit of their workers.
The local and international gig economy is booming because some people have no choice but to work below minimum wages just to pay their household bills. While some people may want lifestyle flexibility, many are just getting by with whatever they can by earning through platforms like Uber.
The fact that a much higher proportion of the population is working in such flexible alternative work arrangements is contributing to the greater elasticity of the global labour force itself.
People are, therefore, becoming much more flexible and more tolerant in accepting mediocre jobs, perhaps even paying much less money.
Employers market
This is where employers can select whoever they want and at a much lower price.
When governments intervene to impose minimum wages or introduce workplace regulations, the unintended consequence is that businesses are more than likely to blatantly contravene them or reduce their operating hours just to avoid penalty rates and taxes. Businesses that cut back on their operating hours impact their workers’ ability to earn an income, at a much lower amount.
Technology impacts incomes
Businesses are requiring fewer people to produce the same level of productivity. Some industries will require significantly fewer people due to advances in science and technology.
Fewer workers required
Workplace automation, which began decades ago, has essentially wiped out the need for manual labour. Far fewer people are now required to produce things. Hence, there is a shift to professional services, which require a higher skill level and education.
The graph below shows the weekly hours of work required, per worker, to match the output of the average British worker in 1930. It clearly shows that technology has significantly reduced the working hours of workers across industrialised countries.
Higher productivity does not equal higher pay
Analysis by the Economic Policy Institute has shown in the diagram below that from the late 1940s to 1979, the pay (i.e., wages and benefits) of typical workers rose in tandem with productivity (i.e., how much workers produce per hour).
This growth may partly be fuelled by post-war production, consumption, and population growth.
Productivity, which measures the goods and services generated per hour worked, rose by 80.4% between 1973 and 2011, compared to a 10.7% growth in median hourly compensation.
New technologies and techniques of production and distribution have enabled this productivity growth.
At its height back in 2000, Goldman Sachs employed 600 traders buying and selling stock on the orders of its clients. In 2017, there are just two equity traders left. Automated trading programs have substantially taken over the rest of the work supported by 200 computer engineers.
In theory, rising productivity provides the potential for substantial growth in the pay for most people. However, income, wages, and wealth generated over the last four decades have failed to trickle down.
Since 1979, pay and productivity have diverged. Perhaps we have reached a tipping point where salaries and wages will never be increased in real terms at all!
From 1979 to 2018, net productivity rose 69.6%, while the hourly pay of typical workers has essentially stagnated — increasing only 11.6% over 39 years (after adjusting for inflation).
What is interesting to note is that only half of today’s 30-year-olds earn more than their parents, as shown in the diagram below. The share of children with higher inflation-adjusted incomes than their parents has significantly declined from around 90% for children born in 1940 to just 50% for those born in 1984.
Perhaps this downward trend will only get worse with more unemployed over-educated graduates.
Rising pay inequality
New technologies have contributed to increased income inequality, especially in the shift from production to services. It has also contributed to the polarisation of employment, disproportionately helping high-skilled professionals while reducing opportunities for other workers.
This trend is likely to continue when technology continues to replace skills and tasks historically associated with low-wage or middle-wage occupations in favour of highly-skilled workers and service-based industries.
Jobs that remain will tend to require more abstract, cognitive skills, or they provide personal services that are not currently economically valued.
Uneven wealth distribution
Although we are working more productively than ever, the fruits of our labour have primarily accrued to those at the top or as corporate profits, especially in recent years. This rising inequality has prevented any potential pay growth, resulting in wage stagnation for many employees and workers.
From 2000 to 2017, wage growth was strongest for the highest-wage workers, continuing the trend in rising wage inequality over the last four decades.
In 1965, CEOs made 20 times what typical workers made. But in 2013, they make just under 300 times typical workers’ pay.
The ability of those at the very top to claim an ever-larger share of overall wages or corporate profits is evident from the diagram below.
As such, there has been an extraordinarily rapid growth of annual wages for the top 1% compared with everybody else – it grew by 138%, while wages of the bottom 90% grew just 15%. Hence, the stagnant salaries and wagers for the large portion of the working population.
Between 1979 and 2013, the hourly wages of middle-wage workers (median-wage workers who earned more than half the workforce but less than the other half) were stagnant, rising just 6%, or less than 0.2 percent per year, as shown in the diagram below.
The wages of low-wage workers fared even worse, falling 5% from 1979 to 2013. In contrast, the hourly wages of high-wage workers rose by 41%.
Tasks have shifted out of mid-wage jobs into low- and high-wage jobs. For every five tasks shifted out of mid-wage jobs, four tasks move to low-wage jobs and one moved to a high-wage job.
As a result, wages are rising faster in the low- and high-wage tiers, than in the mid-wage tier. Low-wage workers gained an average of $600 in annual compensation more than mid-wage workers. High-wage workers gained an average of $1,200 in annual compensation more than mid-wage workers over the same period.
Wages are falling for young people
What is interesting is that a four-year college degree does not guarantee any decent wage growth since 2000, as shown in the diagram below.
In 2013, inflation-adjusted hourly wages of young college graduates were lower than they were in the late 1990s, a trend that held for both young male and female college graduates. Thus, wage stagnation has impacted one-third of workers who have earned a four-year college degree.
Workers must become more educated
As new technologies replaced labour-intensive, routine, and physical tasks, there is an increasing demand for social skills, numeracy, abstract thinking, and flexibility. This shift is responsible for higher returns to a college education and the widening income gap between skilled and less-skilled workers.
As labour-intensive tasks are being automated, the share of income going to capital relative to labour has also increased leading to the lack of salary or wage growth.
More educated job seekers
In 2018, 44% of 25 to 34 year‑olds held a tertiary degree, compared to 35% in 2008, on average across OECD countries.
In 2015, 27% of the US population aged 65 and older reported a bachelor’s degree or more education compared to 36% of adults 25 to 34 years old and 32% of adults aged 45 to 64 years, according to US Census Bureau.
In 2017, around 16% of all those in employment in UK aged 16 to 64 years were overeducated (had more education than required for their job); the corresponding figure for graduates (with a first degree or equivalent) was around 31%.
As businesses are exposed to more technology, having a higher education may be a good thing. High-end complex machines and technology need skilled and experienced creators and operators.
This is where younger job seekers will have no choice but to increase their level of education and study debt just to be able to get a foothold into a depressed job market.
Employers are expecting job seekers to have a tertiary education as a given just for the privilege of applying for job vacancies. But there are no guarantees of jobs for people with college degrees.
Degrees can supercharge your earnings if you have jobs
For those privileged to secure jobs, the graphs below show that between 1980 and 2012, real hourly earnings of full-time college-educated US males rose anywhere from 20% to 56%. Real earnings of males with high school or lower educational levels have declined substantially, falling by 22% among high school dropouts and 11% among high school graduates.
Although the picture is generally brighter for females, real earnings growth among females without at least some college education over this three-decade interval was extremely modest.
This is the effect of income inequality on the working population.
The solution
New sources of opportunities, growth, and value creation are urgently needed to achieve stronger, more inclusive, and more sustainable development for governments, businesses, and workers.
The way to gain higher salaries and wages is to think creatively, develop new products and services, new jobs, new processes and methods, new ways of thinking and living, new enterprises, new sectors, new business models and new social models.
Curiosity, creativity, and innovation can offer some vital solutions to increase salaries and wages.
Innovative economies are more productive, more resilient, more adaptable and better able to support higher living standards.
Governments have to play an active role in facilitating the creation of these new sources of opportunities, growth, and value creation rather than putting up more regulatory barriers and interfering with the globalisation of markets and technology. As the horse has already bolted, governments have to work collaboratively with business and individuals, rather than get in the way.
Increasingly, innovation springs not from individuals thinking and working alone, but through cooperation and collaboration with others to draw on existing knowledge to create new knowledge. The constructs that underpin the competency include adaptability, creativity, curiosity, and open-mindedness. This is where governments and businesses can play a positive role in supporting individual creativity and collaboration.