The International Labour Organisation (ILO) has warned that slashing wages in a bid to boost competitiveness and cut unemployment may have the opposite effect.
The warning was issued came after the European Central Bank (ECB) called in its monthly report for August, for more flexibility in the wage determination process - such as lowering minimum wages - coupled with measures to strengthen competitiveness.
A decrease in wages does tend to lead to an increase in exports, but it also depresses domestic consumption, which affects growth, ILO experts say. “Given the level of economic uncertainty at the moment, it is also unclear whether wage cuts would generate enough incentives to raise investment,” the ILO said.
“Whenever a fall in wages reduces domestic consumption more than it increases exports and investment, it has a negative effect on a country’s economic growth,” a senior economist at the ILO’s Conditions of Work and Employment Branch and main editor of the ILO Global Wage Report, Mr. Patrick Belser, said.
“This explains why declining wages in periods of crisis may actually lead to a spiral of falling aggregate demand and price deflation, rather than to a quicker economic recovery,” he added.
The ILO also warned that seeking to regain competitiveness through lower unit labour costs – by slashing wages or letting productivity grow faster than wages – will be unsustainable globally.
“If competitive wage cuts are pursued simultaneously in all countries, competitive gains will cancel out and the regressive effect of global wage cuts on consumption could lead to a world-wide depression of aggregate demand and employment,” Belser said.