- REUTERS/Thomas Peter
An underlying demographic issue seems to be contributing to stagnating wage growth in both Europe and Japan: the rising number of older workers.
Theoretically speaking, a tighter labor market should lead to more wage growth because workers in that situation have more employment options, meaning firms that want to keep quality workers must offer more-competitive wages.
But neither Europe nor Japan has seen this happen, even as unemployment rates have tumbled in both regions. Japan’s rate dipped to a 21-year low of 3.0% in July, and the eurozone’s unemployment rate was at 10.1% in July, down from 10.8% a year earlier.
At the same time, the eurozone’s wages grew just 1.8% in March, and wage growth has averaged only 1.9% from 2009 to 2016. Wages in Japan rose 1.4% in July, following a few months of 0% growth in late 2015 and early 2016.
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So what’s going on? For both regions, it seems that the rising number of older workers could be contributing to the lower wage growth.
In Japan’s case, “the tight labor market … is delivering pay increases for younger workers willing to move jobs, but a low level of labor market mobility and a rising share of older workers, for whom pay rises are harder to find, is keeping overall wage growth subdued,” Capital Economics’ Marcel Thieliant wrote in a note to clients.
“Younger people tend to find it easier to get higher pay when they change jobs,” he continued. “However, pay cuts remain the rule for older workers, and their rising share in total employment has kept a lid on overall wage gains.”
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As for the eurozone, “the fall in the unemployment rate may not reflect the true amount of slack in the labor market,” Karen Ward, HSBC’s chief European economist, wrote. “We get this impression from looking at the participation rates.”
If you look at the chart below, you can see that the participation rate of eurozone workers ages 55 to 64 in the labor market has increased significantly over the past few years. It was about 60% in 2015, up from about 37% in 1997.
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“This [trend] appears to have been offset by participation in the younger age category, so the overall participation rate hasn’t risen by as much. But if this fall in the participation of younger workers in temporary (and the fact that many of the young still re-enter the labor market in the summer months), then the ‘true’ participation rate is higher, and thus current employees might not have such bargaining power.”
In any case, we should note that the rising share of older workers in both the European and the Japanese economies is obviously not the only thing keeping wage growth from picking up.
Japan also has a low level of labor-market mobility, and the bargaining power of unions has decreased, Thieliant said.
Ward also noted that top-line pressures were still difficult for firms in Europe, and she suggested that some households were “stuck in a rut” and therefore might be “not battling for higher pay in the way they might have in the past.”
Another interesting trend in the eurozone is that an increasing proportion of workers are part time – up to about 22% in 2016 from about 14% in 1997, according to Eurostat data cited by HSBC.
But still, the rise in older workers is a trend worth paying attention to – especially given that Europe and Japan have some of the oldest populations in the world and are starting to run into serious demographics-related problems.