Why real wages are stagnating in Japan and Korea

In many developed countries, real wage growth has lagged behind labour productivity growth in recent decades. This column uses data from Japan and Korea to study the relationship between labour productivity growth, real wage growth, and labour’s terms of trade, defined as the ratio of the consumer price index to the GDP deflator. It shows that the main reason for the real wage-labour productivity growth gap is a large decline in labour’s terms of trade. Raising real wages in the future will require policies to support the business environment and develop high value-added sectors

di Hyunbae Chun, Kyoji Fukao, Hyeog Ug Kwon, Jungsoo Park

In recent decades, real wage growth has lagged behind labour productivity growth in many advanced countries. Several studies suggest that this growth gap is driven by the fall in the labour income share (Dabla-Norris et al. 2015, ILO 2018). Some countries like Korea and Japan raised the minimum wage in response to these findings. However, in this column we find that most of the observed gap between the real wage and labour productivity growth originates from differences in prices indices. Thus, when wage growth and labour productivity growth are compared in nominal terms, most of the observed gap disappears for many countries. Usually, the nominal wage is deflated by the consumer price index (CPI), whereas nominal GDP is deflated by the GDP deflator to obtain the real terms. Therefore, the widening real wage-labour productivity growth gap in real terms is influenced by the changes in the CPI-GDP deflator differential. As shown in Figure 1, the changes in labour’s terms of trade – the CPI–GDP deflator differential – and the real wage-labour productivity growth gap are positively correlated with a correlation coefficient of 0.664. Widening real wage-labour productivity gaps have been witnessed in the past and in several studies in the related literature such as Bosworth and Perry (1994), Feldstein (2008), and Pessoa and Van Reenen (2013), which provided a similar explanation for the observed gap.

Continua la lettura su Voxeu.org