Workers’ Pay Globally Hasn’t Kept Up With Inflation

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.

Note: Usual Northern Sea Route shown for illustrative purposes Source: Sea Legend Daniel Kiss/WSJ

Shipping cargo through an Arctic shortcut never made economic sense—until now.

Climate change and war in the Middle East are flipping the math that previously kept ships plying longer routes from Asia to Europe. A Chinese company on Saturday is starting the first regular cargo service to Europe through Arctic waters, seeking to reap the benefits of quicker travel time and less fuel use.

The shipper Sea Legend will dispatch the Dubai Tower from Ningbo, China, to Felixstowe in the U.K. on what it calls the Arctic Express, following a route along Russia’s north coast. The voyage by the vessel, which is capable of carrying 1,740 20-foot containers, is the biggest commercial step in the Arctic since a Maersk containership first completed the route in 2018.

Global warming is a big factor behind the new route, but it is not the only one. Nearly half the Arctic region’s summer ice—an area four times the size of Texas—has melted over five decades, clearing a fairly reliable path in the summer months. Meanwhile, high oil prices and attacks by Houthi rebels in the Red Sea have made the traditional routes costlier and more dangerous.

Members of China's 16th Arctic Ocean scientific expedition team take selfies on the ice surface. — Members of a Chinese scientific expedition team on surface ice in the Arctic Ocean this week. Wen Jinghua/Xinhua/ZUMA Press

Beyond that, Beijing has ambitions to play a role in the Arctic’s future, lending a geopolitical dimension to the Chinese company’s shipping route.

Last year Sea Legend completed a trial run from Asia to Europe in a record 20 days. That is roughly half the time of a voyage via Africa’s Cape of Good Hope that many carriers now take because of the Red Sea uncertainty.

Fuel accounts for 70% or more of the costs while at sea, said Alan Murphy, a former Maersk analyst who runs research firm Sea-Intelligence.

Saving fuel by shortening the journey doesn’t automatically make a route profitable. Insurance premiums for the Arctic are 40% higher than the Cape of Good Hope route, said Jonathan Steenberg, an economist at credit insurer Coface. Sea Legend’s Arctic vessels are relatively small. And even after warming, an icebreaker is still sometimes needed to help the cargo ship.

But if the ship can go without an icebreaker, Coface said the Arctic route is now cheaper than a Cape of Good Hope voyage in some circumstances. It estimated that at current oil prices of around $90, the cost of shipping liquid bulk such as liquefied natural gas could drop roughly 33% compared with the Cape of Good Hope route, while dry bulk goods such as cereals would cost about 8% less.

The container ship Istanbul Bridge being unloaded by large blue and red cranes at the port of Gdansk. — A containership operated by Sea Legend in the port of Gdansk, Poland. jackowski/epa/Shutterstock

The route is only passable in the summer and fall. Sea Legend plans eight voyages between August and late October, before conditions get too icy.

“It’s not the Suez Canal but it’s a significant number for the Arctic. It shows there is potential,” said Malte Humpert, founder of the U.S.-based Arctic Institute and author of a book on Chinese shipping in the Arctic.

Even in summer, ships have to navigate around dangerous ice floes and deal with rapidly changing weather. By the end of the shipping season in October, the sky is dark most of the time.

A Russian tanker suffered serious damage to its hull while sailing along the Arctic route despite being assisted by an icebreaker, its insurer, AlfaStrakhovanie, said Thursday, adding that it paid out roughly $650,000.

Coface estimates 3.5% of trade among East Asia, Europe and North America will be able to use Arctic routes within the next five years, representing $64 billion in goods.

Last summer, a record 23 cargo ships transited the Northern Sea Route, which hugs Russia’s north coast. That is tiny compared with the Suez Canal, where more than 30 ships transited daily.

Western companies that want to follow in Sea Legend’s path have to navigate treacherous politics. Russia claims sovereignty over the entire Northern Sea Route and permits for ship traffic are issued by its state-controlled nuclear operator, Rosatom.

Aerial view of a port with many cargo ships, red cranes, and rows of stacked shipping containers. — The Dubai Tower’s route will begin in the Chinese port of Ningbo. Huang Zongzhi/ZUMA Press

“Western companies are in a tricky position,” said Humpert of the Arctic Institute. “At what point do they jump back in the water? When does it become economically necessary, and how do you weigh that against environmental risks and the political dimension?”

An alternative Arctic route, the Northwest Passage that connects the Atlantic and Pacific oceans via the Canadian Arctic, is less passable because it is dominated by narrow waterways where ice gets bunched up. The highest number of cargo ships completing the passage in a year was 13, in 2023.

China has declared itself a near-Arctic state despite not having access to Arctic waters. It depends on Russia’s goodwill to use the Northern Sea Route.

“Beijing is concerned that if they don’t establish a significant strategic presence in the Arctic now, it’s going to be more difficult in the future,” said Marc Lanteigne, expert in polar geopolitics at the Arctic University of Norway in Tromsø. However, he said, “China needs to be careful not to give the impression that they are trying to challenge the strategic order in the Arctic.”

Sea Legend didn’t respond to requests for comment.

Any polar venture contributes to China’s quest to master Arctic travel. The country also has three icebreakers and a support vessel currently on a monthslong scientific expedition north of Greenland. Scientific and commercial voyages can yield data about natural resources awaiting below melting ice caps and information for positioning nuclear-armed submarines.

Workers’ Pay Globally Hasn’t Kept Up With Inflation

Decline in purchasing power could reverse this year if prices rise more slowly

China is launching the first regular Arctic cargo route to Europe, offering faster journeys and lower fuel costs as melting ice and Red Sea risks reshape global shipping.