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OECD: Wage cuts will not create jobs

OECD: Wage cuts will not create jobs

| Text: Björn Lindahl, photo: OECD

Industrialised countries have reached the limit for how much wages can be cut. Since the start of the economic crisis, wages have fallen in real terms for half of all employees in OECD countries. Further cuts could be counter-productive and damage growth.

This was the message from the OECD’s Secretary-General Angel Gurría when he presented the 2014 OECD Employment Outlook.

“While wage cuts have helped contain job losses and restore competitiveness to countries with large deficits before the crisis, further reductions may be counter-productive and neither create jobs nor boost demand,” Angel Gurría told a Paris press conference on 3 September.

According to the OECD, unemployment in member countries will fall somewhat in the next 18 months, from 7.4 percent in mid-2014 to 7.1 percent at the end of 2015. Nearly 45 million people are unemployed within the OECD. That is 12.1 million more than before the financial crisis hit in 2008.

No real wage growth 

According to the Employment Outlook real wage growth has been nearly stagnant since 2009, and in many countries — including Greece, Portugal, Ireland and Spain — it has fallen by two to five percent a year. 

“Governments around the world, including the major emerging economies, must focus on strengthening economic growth and the most effective way is through structural reforms to enhance competition in product and services markets. This will boost investment, productivity, jobs, earnings and well-being,” said Angel Gurría.

This is partly a new message from the organisation which represents 34 of the world’s most industrialised nations. Gurría underlined that countries with the largest budget deficits before the crisis were not doing anything wrong by cutting costs and slowing wage growth.   

“It has helped them restore competitiveness. But this might not be the right remedy in the future.”

Although the situation is of course more difficult for those who have become unemployed, the economic crisis has also hit those who managed to keep their jobs. 

“There is a lot of opposition to cuts in nominal wages. Instead we have seen cuts to bonuses and overtime pay. But money is money, and families’ purchasing power has suffered,” said Angel Gurría.

Minimum wage in 26 countries

Since prices have not fallen in line with wages, most people are worse off. Increasing the minimum wage, like the USA and Germany have done, at least helps those at the bottom of the salary pyramid. This year’s employment outlook also features statistics on work quality. Increased flexibility is no panacea either.

“Less than half of those in temporary jobs got permanent jobs three years later,” Angel Gurría pointed out.

26 of the 34 member countries have now introduced a minimum wage — a solution opposed by Nordic trade unions because they want to retain the opportunity to influence wage negotiations. But the OECD also wants minimum wages to be implemented in a manner which gives them maximum effect. Regional differences should be taken into account, as well as differences in age and skills.


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