IMF World Economic Outlook, October 2017

Poor wage growth and the hangover from the Great Depression.

Melbourne was very lucky to host this event – it usually only passes through Sydney and Canberra. The presentation was made by Dr Petia Topalova, a very accomplished economist and a great presenter. Dr Topalova was born in the former Yugoslavia, studied at Cambridge, and is now a published writer for the IMF in their Washington, DC. headquarters. Like I said, accomplished.

And this week she was in Australia delivering the IMF’s October 2017 World Economic Outlook. Clearly she’d made this presentation a few times, so it was largely committed to memory. But more importantly, she didn’t miss a single step during the Q&A. Every question was answered clearly and concisely, with no hesitation or uncertainty. The Doctor knew her stuff.

The focus of this presentation was the recent disconnect in advanced economies between economic growth and wage growth. We are starting to see, especially in the US but also in Australia and other advanced economies, economic growth pick up and unemployment rates fall. Economic theory would suggest that as this ‘slack’ is picked up, wages should start to recover also. But they aren’t. In fact, wage growth is still below pre-GFC rates. For the economists amongst us, this means the Phillips Curve is flattening. Why?

Well this recent phenomenon, largely occurring in advanced economies, is supposedly because of the modern proliferation of ‘involuntary part-time work’ – workers (particularly low to medium skill) who would like to work more hours but are restricted to part-time work. Not technically unemployed, but definitely underemployed.

Increasing use of temporary contracts is also part of this trend.

As to be expected, this results in workers have less bargaining power to demand greater wage growth – hence this modern disconnect between economic and wage recovery[1].

An important implication of this is for social safety nets. Modern social safety nets were largely designed after the Great Depression and WWII, when most workers were either full-time employed, or unemployed. And if you were unemployed, you qualified for these social safety nets.

Today, social safety nets need to adapt to increasing part-time work – workers who, while not technically unemployed, are underemployed and therefore, likely in need of greater support than a full-time employed worker, and greater support than current social safety nets are designed to provide.

A side note on Japan:

'Abenomics' (Prime Minister Shinzo Abe's strategy of monetary easing, fiscal stimulus and structural reform) seems to have provided a little boost in terms of some indicators. But inflation rates are still well below target. And their ageing demographic will continue to weigh on activity.

Japan really is a cautionary tale for the rest of the world. During a crisis, Central Banks and governments need to react quickly and strongly, lest inflationary expectations become so ingrained that, three decades later, active policy has virtually no discernible impact on the economy.

Greater openness to skilled immigration would also help.

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[1] Note in commodity countries such as Australia, Canada and Norway, recent declines in commodity prices have also weighed on wage growth.

Interestingly, increasing automation was not a very significant force behind tepid wage growth – not since the early 2000s.