Have We Become Too Flexible?

LONDON – As 2015 begins, the reality of deficient global demand and deflationary risks in the world’s major economies is starkly apparent. In the eurozone, GDP growth is slowing, and inflation has turned negative. Japan’s progress toward its 2% inflation target has stalled. Even economies experiencing more robust economic growth will miss their targets: inflation in the United States will not reach 1.5% this year, and China’s rate reached a five-year low of 1.4% last November.

In the advanced economies, low inflation reflects not just the temporary impact of falling commodity prices, but also longer-term wage stagnation. In the US, the United Kingdom, Japan, and several eurozone countries, median real (inflation-adjusted) wages remain below their 2007 levels. Indeed, in the US, real wages for the bottom quartile have not risen in three decades. And, though the US created 295,000 new jobs last December, actual cash wages fell.

The developing world is not doing much better. As the International Labor Organization’s latest Global Wage Report shows, wage gains are lagging far behind productivity growth.

Because real income growth is vital to boost consumption and prices, central bankers and politicians are now in the novel business of encouraging wage increases. Last July, Bundesbank President Jens Weidmann welcomed the fact that some German companies had raised wages above inflation. Japanese Prime Minister Shinzo Abe has gone a step further, repeatedly urging companies to increase wages – and encouraging them to do so by reducing corporate tax. So far, however, jawboning has had little effect.