Why are our Wages Growing so Slowly

Guido Baldi and Martina Pons

In many advanced economies, real wages have risen only moderately in recent years. Technological progress and globalization have not been associated with large gains for many employees.

In most advanced economies, real wages have risen only moderately in recent years. Switzerland cannot fully escape this global trend, although real wages have increased faster while inequality has increased less than in many similar countries. As a result of this pattern, the share of labor income of the total national income has decreased in many countries. According to data from the Organization for Economic Co-operation and Development (OECD), in the 1970s workers in many countries earned over two-thirds of the total national income. Since then, this proportion has decreased by approximately five to ten percentage points in many countries. This decline in the labor share has been particularly pronounced in countries such as the United States, France, and Italy.

Against a backdrop of ongoing technological change and globalization of past decades, slow wage growth is a paradox. These developments should indeed promote specialization and should consequently increase wages - but this can only be observed for a certain proportion of companies and employees. Current forms of technological change and globalization offer advantages to firms that benefit from economies of scale (e.g., in the information and communication technology or pharmaceutical sectors). Such companies can continuously increase productivity levels and generate cost-intensive innovations. Many employees of these leading technology companies have enjoyed considerable wage increases. However, in most countries the share of employees working for these very productive companies is rather low and has decreased over recent decades. In other sectors of the economy, productivity has increased only slightly. As a result, aggregate wage growth has been only moderate, and inequality levels have increased.

In those sectors of the economy that have experienced low levels of productivity growth (for example the construction sector, the health sector or services in general), there are not only employees with low qualifications but also many people who undergone long and demanding periods of training – highly skilled professionals as well as doctors, lawyers, business economists or social scientists. It may be that many countries have failed to prepare people for ongoing technological changes by not sufficiently investing in education and professional development. It is certainly fundamental to improve access not only to information but also to new forms of professional development that are more heavily focused on the specific needs of employees and companies. However, perhaps equally important is the fact that new technologies will better complement individuals’ existing skills. As a result of low productivity growth, job pressures have often increased. This has decreased job satisfaction levels and has consequently hindered creativity and innovation.

The limited and unequal wage development observed in many countries may already have contributed to a gradual polarization of society in some countries while contributing to the emergence of extreme political positions. To counteract this trend, it is important that more employees benefit from new technologies and wage increases. In addition to incremental improvements and adaptations of education systems to the digital revolution, it is crucial that technological progress complements people's know-how and thus consequently increases workers’ productivity levels. Current trends of portraying interactions between technologies and people as a race have led to a dead end. Even those with more and better education can only lose in such a competition. New technologies are available to make individuals’ lives and work more enjoyable. New technologies should thus serve people and not the other way around.