Workers’ Pay Globally Hasn’t Kept Up With Inflation
Decline in purchasing power could reverse this year if prices rise more slowly
Decline in purchasing power could reverse this year if prices rise more slowly
Wage growth across advanced economies is plateauing or declining from high levels. For central banks, it is good news: There are no signs of a spiral in which wages push up prices, which push up wages again. That makes it more likely inflation could decline without a significant increase in unemployment.
For workers, though, it is less positive. Wages rose faster last year than in the previous two years, but not as much as prices across major advanced economies, according to projections by the International Labour Organization. Workers’ purchasing power—their average inflation-adjusted wage—was lower last year than in 2019, before the pandemic, according to the report. So despite strong demand for workers and ultralow unemployment, labor’s share of economic output shrank in many advanced economies.
In the U.S., nominal wage growth—meaning unadjusted for inflation—has slowed sharply since the middle of last year, according to a variety of measures. Average hourly earnings for private-sector nonfarm workers rose 4.4% in the 12 months through January, down from 5.6% last March and less than the 6.4% rise in consumer prices in the year through January.

In Europe, average wage growth across six countries declined to 4.9% in December from 5.2% in November, according to a report by Ireland’s central bank and the recruitment company Indeed, which tracks advertised wages across millions of online job ads. Inflation in the eurozone ended the year at 9.2%.
In Canada, central bank chief Tiff Macklem highlighted easing wage growth to explain the bank’s recent decision to pause interest-rate increases after raising its key rate to 4.5%, the highest level in 15 years.
“Wage growth is currently running between 4% and 5% and appears to have plateaued within that range… The risk of a wage-price spiral has diminished,” Mr. Macklem said.
Economists have noted that pay growth tends to lag, not lead, inflation as workers and employers adjust pay expectations to the prices they have experienced. Thus, the recent decline in pay growth might reflect, with a lag, the fact inflation peaked around summer and fall of last year in major economies like the U.S. and eurozone and has since declined, as energy prices fell sharply and global supply-chain pressures eased.
Why, though, did wages never catch up with inflation in the first place? One reason is that wages tend to be sticky, changing relatively slowly and sluggishly—over months and years—while prices can change more rapidly. Firms might be wary of raising wages aggressively since cutting them later would be bad for morale.
Now, slowing economic growth and the threat of layoffs might be tempering workers’ demands, said Andrea Garnero, an economist with the Organization for Economic Cooperation and Development. Labor unions in Europe have grown more concerned about job security than wages, he said.
Workers’ pay demands have been reasonable in part because their incomes were supported by government aid during the pandemic and energy crisis, said Gabriel Makhlouf, governor of Ireland’s central bank. “People understand that they can make things worse if they require the wrong [pay] deal,” he said in an interview.
Crucially, the number of workers, which shrank in the first months of the pandemic, is rebounding in many advanced economies, helping to ease shortages.
Some workers who left the labor force during the pandemic are being tempted back as pandemic savings dwindle and are eroded by inflation. Almost 83% of Americans ages 25-54 are working or actively looking for work, roughly back to the pre pandemic rate, according to the U.S. Labor Department. About 86.5% of Europeans ages 25-54 have jobs or are actively searching, 1 percentage point above prepandemic levels. The U.K. stands out for a decline in its labor-force participation coupled with unusually strong wage growth, suggesting that a shortage of workers could be driving pay higher.
Immigration has also rebounded strongly in recent months, hitting record levels in Canada, Spain and Germany as some governments try to make up for shortfalls during the pandemic.
In the U.S., net international migration added more than a million people to the population in the year through mid-2022, the Census Bureau said. Migrant workers could have helped fuel January’s robust 517,000 increase in nonfarm payrolls while keeping wage inflation moderate, said Torsten Slok, chief economist at Apollo Global Management. The same forces could be at play in Europe, he said.
History suggests that workers often fail to claw back losses from high inflation. In the U.S., periods of high inflation were, in general, periods of lower real-wage growth, according to research by the Federal Reserve Bank of St. Louis. High inflation in Australia in the 1970s and 1980s led to real income losses for workers, according to the country’s central bank.
But there are reasons to think real wages might recover soon. Wage growth remains around its fastest in at least a decade across a range of advanced economies. It could stay elevated as wage bargaining proceeds.
Absent a deep recession, unemployment could stay low enough to preserve some bargaining power for workers. The labor supply is being constrained by aging populations across advanced economies and increased worker absences due to illness, often Covid-19.
And markets are betting inflation will fall rapidly this year across advanced economies. If so, it could well fall below wage growth, so real wages would rise—along with workers’ share of the economic pie.
As housing drives wealth and policy debate, the real risk is an economy hooked on growth without productivity to sustain it.
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As housing drives wealth and policy debate, the real risk is an economy hooked on growth without productivity to sustain it.
For decades, Australia has leaned into its reputation as the lucky country. But luck, as it turns out, is not an economic strategy.
What once looked like resilience now appears increasingly fragile. Beneath the surface of rising property values and steady headline growth, the Australian economy is showing signs of strain that can no longer be ignored.
Recent data paints a sobering picture. Australia has recorded one of the largest declines in real household disposable income per capita among advanced economies.
Wages have failed to keep pace with inflation, meaning many Australians are working harder for less. On a per capita basis, income growth has stalled and, at times, reversed.
And yet, on paper, things still look relatively solid. GDP is growing. Unemployment remains low. But that growth is increasingly being driven by population expansion rather than productivity.
More people are contributing to output, but not necessarily improving living standards.
That distinction matters.
For years, Australia’s economic success rested on a powerful combination: a once-in-a-generation mining boom, a credit-fuelled housing market, strong migration and a property sector that rarely faltered. Between 1991 and 2020, the country avoided recession entirely, building enormous wealth in the process.
But much of that wealth is tied to property. Around two-thirds of household wealth sits in real estate, inflated by leverage and sustained by demand. It has worked, until now.
The problem is the supply side of the economy has not kept up.
Housing supply is falling behind population growth. Rental vacancies are near record lows.
Construction firms are collapsing at an elevated rate. At the same time, massive infrastructure pipelines are competing with residential projects for labour and materials, pushing costs higher and delaying delivery.
The result is a system under pressure from all angles.
Despite near full employment, productivity growth has stagnated for years. In simple terms, Australians are putting in more hours without generating more output per hour. The economy is running faster, butgoing nowhere.
Meanwhile, government spending continues to expand. Public debt is approaching $1 trillion, with spending now accounting for a record share of GDP.
The gap between spending and revenue has been filled by borrowing for decades, adding further pressure to an already stretched system.
This is where the uncomfortable question emerges.
Has Australia become too reliant on a model driven by rising property values, expanding credit and population growth?
As asset prices rise, households feel wealthier and borrow more. Banks lend more. Governments collect more revenue. Migration fuels demand. The cycle reinforces itself.
But when productivity stalls and debt outpaces real income, the system begins to depend on constant expansion just to stay stable.
It is not a collapse scenario. But it is not particularly stable either.
Nowhere is this more evident than in housing.
The National Housing Accord targets 1.2 million new homes over five years, yet current completion rates are well below that pace. With approvals falling and construction costs rising, the gap between supply and demand is widening, not narrowing.
Housing is also one of the largest contributors to inflation, with costs rising sharply across rents, construction and utilities. Yet the private sector, from small investors to major developers, is struggling to make projects stack up in the current environment.
This brings the policy debate into sharper focus.
Tax settings such as negative gearing and capital gains concessions have undoubtedly boosted demand over the past two decades. But they have also supported supply. Removing them may ease prices briefly, but risks deepening the supply shortage over time.
That is the paradox.
Policies designed to make housing more affordable can, in practice, make the shortage worse if they discourage development. The optics may appeal, but the economics are far less forgiving.
It is also worth remembering that most property investors are not institutional players. The majority own just one investment property. They are, in many cases, ordinary Australians using real estate as their primary wealth-building tool.
Undermining that system without replacing it with a viable alternative risks unintended consequences, from reduced supply to higher rents and increased inflation.
So where does that leave Australia?
At a crossroads.
The country can continue to rely on population growth and rising asset prices to drive economic activity. Or it can shift towards a model built on productivity, innovation and sustainable growth.
The latter is harder. It requires structural reform, long-term thinking and political discipline.
But it is also the only path that leads to genuine, lasting prosperity.
The question is no longer whether Australia has been lucky.
It is whether it can evolve before that luck runs out.
Paul Miron is the Co-Founder & Fund Manager of Msquared Capital.
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