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The Future of Work Podcast

Episode 12

Why growth in wage inequality is a problem for us all

7 December 2021

Research has found that the COVID-19 crisis has made many existing world-of-work inequalities worse and exposed new ones.

A particularly significant trend is the growth in wage and income inequality, because this fuels other forms of inequality. What’s more, the consequences of growing wage inequality go beyond those directly affected, rippling through all socio-economic levels and hampering economic recovery and growth.

Patrick Belser, ILO senior economist and wage specialist explains the causes of income and wage inequality, the links with economic growth, and some of the strategies that can counter the damage.


Hello and welcome to this edition of the ILO's Future of Work podcast.

I'm Sophy Fisher.

This month, the International Labour Conference,

which brings together the ILO's 187 member states, will be meeting.

One of the items on the agenda will be the issue of inequality.

The topic is particularly relevant right now as policymakers plan

for recovery because research by the ILO and many other organizations

found that during the COVID-19 crisis, inequality got worse.

Existing inequalities deepened and new inequalities emerged.

Now, when looking at inequality and ways of tackling it,

one important element is wages or income.

This is an area on which the ILO has done some interesting work.

With me now is Patrick Belser,

Senior Economist and wage expert at the ILO in Geneva.

Patrick, welcome, and thank you for joining us.

-Thank you, Sophy.

-Patrick, let me start with a really basic question,

which is, why does inequality matter?

-I think inequality is very important.

There has always been some level of inequality

between people because obviously, we're not one and the same.

People have different abilities and people make different choices.

Some level of inequality is a fact of life,

but when inequality is very high,

it's definitely very bad for people and for societies.

That has been increasingly documented by academics, by different organizations.

Obviously, it hurts people to have to live in poverty

and to not be able to afford a decent lifestyle for their children,

when at the same time they see other people

who enjoy a very comfortable life, buy houses and three cars.

The poor people see that the money is there but it's not for them.

They struggle while other people seem to have a very comfortable life.

When you have these different realities for different people,

you have also societies that tend to fall apart when people live

in different bubbles.

-Just so we know exactly what we're talking about,

what's the difference between income inequality

and wage inequality

because they're not quite the same, are they?

-No, they're different concepts.

Wages is one source of income.

It's really what people get in exchange of their work from their employers.

You need to be a waged employee, an employee, a salaried person,

and then you receive a wage.

The wage is what you get in exchange for the hours of work that you put in

for the employer.

Of course, that's not the only source of income for people and families.

Some people work and don't have an employer.

These are the self-employed people.

We know that in developing countries,

many people work in the informal economy where they're self-employed.

You have also people who work on digital platforms

who don't have stages of waged employees.

Then, of course, people also have their own lands or their own capital,

and they receive incomes from these things, from land and capital.

People can also get income from the state through social transfers,

social security.

Wage inequality is really what happens in the markets when people

are in the labor markets in the world of work.

Whereas, the income inequality is really a broader notion

which is normally also measured at the level of families because normally,

you share your income within a household or a family.

-Wage inequality applies to those who are formerly employed

in the ILO definition of formal employment?

Is that right?

-Many of the waged employees are formally employed,

but you have also waged employees in informal enterprises, for example,

or you can also have situations of casual waged workers.

In India, for example, this is the case where people

are recruited in the morning and they work for one day.

They are not formal, but nonetheless, they have an employer.

Somebody recruits them and pays them for the job that they do.

You have a lot of waged workers in the informal economy as well, in fact.

-How does wage inequality interact with other forms of inequality?

-I think that's a very interesting question because in reality,

we, in the ILO in particular, consider that there's not inequality

in the singular there are inequalities

because inequalities can take so many different forms.

You have inequality between people who earn a lot of money

and those who earn little money,

but you have also inequalities between groups.

You can have discrimination

against particular groups in the labor market.

We'll see, for example, in migrants versus nationals

also you have gender inequality, very big issue, of course,

in the ILO and the world, in the modern world

which is inequality between men and women.

You always have to ask inequality between who and inequality of what,

and in a way, the issue of income inequality is a bit of like a prism

through which you look at the topic of inequalities, but behind,

there are many different inequalities.

Wage inequality is correlated with other forms of inequalities.

If you have a low wage, you're also likely to not have access

to social security, you may have no social protection benefits.

You may have no access to health services,

and so the wage inequality is often related to many other forms

of inequalities which are also very important.

-Presumably, if you are on the wrong side of wage inequality,

e.g., you're getting paid less,

that would compound other inequalities because essentially,

wage inequality would mean that you have less disposable income

and therefore fewer choices.

-Yes, absolutely. That's true.

In fact, we've also observed that in many countries,

the growing wage inequality lies

at the root of the growing income inequality.

When wage inequality becomes bigger in the world of work,

then there is also a likelihood that inequality, in general,

becomes bigger and so these notions are very much related.

You see also that people who work in jobs that are very low paid,

they also very often struggle to get enough hours of work.

We know that low-paid workers often work part-time and so they struggle

on many different fronts and wage inequality is just one part

of the problem that they face.

-I've read that developing economies seem to have greater income

and wage inequality.

Is that actually the case or is that just a myth?

-No, that is true.

We've looked at income inequality in all our member states,

that is those we have data, and in general,

it is true that income inequality is even higher in emerging

and low-income countries than it is in more advanced countries.

Some countries like South Africa and Brazil are quite extreme

in that regards.

In South Africa, we know that the highest 10%

of income earners earn about two-thirds of the country's total income,

so you can imagine the extent of the inequality.

In Brazil, it's also about 60%,

in a country like France it would be more like 30% or 35%.

It is true that inequality tends to be higher in developing countries.

This being said, we've also observed

in recent times that inequality has increased

in a lot of the more advanced countries.

-Why is that?

-Well, one part of the story is more wage inequality,

another part of the story is higher returns to capital for people

who have a lot of savings.

It's also interesting to see that more and more the people

with high wages are also the people with a lot of capital.

Somehow a lot of the benefits of past economic growth has accrued

to people at the top of the pyramid.

We've also seen that inequality has increased both between

and within enterprises.

Within enterprises, you see more dispersion

at least in Europe and in the US

and you have also more inequality between enterprises.

You have some top star enterprises who are doing extremely well,

and then you have 80% or even more enterprises

which would struggle to actually make a margin.

That form of inequality has also been one of the reasons behind that trend.

-Is there also an association between very fast economic growth,

which in many cases but not always is associated with developing economies,

and the levels of income and wage equality or inequality?

-Yes. There's even some academic theories

that propose the idea that when countries develop,

there will inevitably be some growing inequality

because the country doesn't grow in all its sector at the same time,

and so you tend to have some sectors which emerge,

which become modern high-tech and where productivity is very high.

Those minority of people working in those sectors start

to earn higher wages and higher incomes

while the others are left behind for a while.

In developing countries,

you have the coexistence between the modern part of the economy

and a large informal economy, which inevitably means inequality.

There is a more recent research showing that this is not necessarily the case,

that it always happens like this,

that if you have good education systems and if you have inclusive policies

that you can have fast economic growth

in a way that ensures a fair distribution of the benefits

of growth and so there is no inevitability in the increase in inequality linked

to economic growth.

I would even say now that a lot of the recent studies

also look at the reverse relationship is that when you have too much inequality,

you will have slower economic growth, because we need that.

We know that if you should want to grow solidly as a country,

you need to have the solid middle class with people who have money to spend

and to buy the goods and services that are produced in the country.

A solid middle class also requires some equitable distribution

and when you don't have that, then ultimately,

your economic growth may slow down and become less sustainable.

-Because presumably if people have no spare income,

they can't invest in things like their own SMEs or in education

for themselves or their kids,

and therefore provide the next generation of businesses

and workers with a higher skill set.

-That's also true.

There's also, of course,

the whole issue of investments in the skills

and education of your children.

When you're poor it's very difficult,

whereas when their wealth is more broadly spread,

then countries tend to have higher levels of what is called human capital.

That's where a more equitable and balanced and robust economy can also emerge

where enterprises and small enterprises which have relatively high productivity.

There is a connection between equity and faster economic growth.

-Of course, I think we should bring out here,

and this is something you touched on earlier,

that we're not simply here talking about how much money people have

or may not have in their pockets,

but inequality knocks on into things like social stability

and the long-term ability of economies to grow

and to provide a workforce for specific sectors,

and also into things like health and long and length of life, doesn't it?

-Yes, absolutely.

That's the idea of having a social cohesion

when you have an equitable distribution of income

and wages are more or less equitable,

but you have people who feel they belong to the same country, to the same society.

We don't have the sense of people living on different planets

or in different bubbles.

That social cohesion is really very important

when it comes to economic development and the development of social security,

social protection systems,

and it's also linked to the issue of trust.

When people don't trust each other you don't have a well-functioning economy

and it can go much further than that, of course,

that when you have highly unequal societies,

you tend to have much more crime, you tend to have much more violence.

If we go to the very extreme of that thinking,

we come back to the reason why the ILO was created in the first place,

because the ILO's creation was based on the idea that you need social justice

in order to have peace in the world.

That's an idea that we will be well inspired to remember

a bit more frequently on these days.

-Now, you've been looking at some of the effects of the pandemic,

the COVID crisis on wage inequality.

What were some of the things that you found?

-Well, indeed, we've been publishing the Global Wage Report,

which has looked on this issue,

and others in the ILO have looked on this issue too.

The ILO Monitor has been looking at this issue.

I think it's clear that, first of all,

a lot of the people who lost their jobs during COVID are disproportionately

low-wage workers because the high-wage workers

had more possibility to carry on working

from home to do what we call the teleworking from home.

Also because some of the sectors that closed like restaurants

and hotels employ a disproportionate number of workers with low pay.

In that sense,

it's quite clear that the pandemic has further increased inequality,

especially wage inequality when you include all the people

who suddenly earn zero wages.

There's clearly been an unequal impact of the crisis.

It's been also the case from the perspective of gender inequality

because many women have been affected

by the lockdowns and the closure

of sectors where they were overrepresented.

It's very important that when we think of the recovery,

we keep those inequalities in mind because there can be no human-centered

recovery if the recovery is a very unequal recovery,

which further deepens pre-existing inequalities.

-No lasting and stable recovery anyway.

Let's talk a bit about what can be done about wage inequality and indeed,

income inequality and some of the tools.

Let me start off with one idea that's bandied around quite a lot,

which is that of minimum wages,

what role do you think minimum wages play in reducing wage inequality?

-They play a very important role.

Minimum wage is a legal tool to ensure that there is a minimally acceptable level

of wages that is being paid in the economy,

to ensure that workers can actually live together

with their families in a decent way

as a result of the work that they carry out.

We see that more and more countries have come around to this idea

that minimum wage is actually a very useful tool

to reduce wage inequality

but to ensure also that those people at the bottom of the pyramid earn

some decent level of wages and incomes.

90% of ILO member states do have minimum wage systems in place.

Sometimes they don't work as well as they could,

sometimes they don't cover vulnerable groups

of workers like domestic workers or others,

sometimes they are set at a level that is too low but 90% of countries

have minimum wages and the ILO is working

with a lot of countries to actually improve

the minimum wage systems.

Of course, it has to be said that in order to be very effective,

the systems need to be well designed, set at the right adequate level,

either by governments or through collective bargaining

but there also needs to be decent levels of compliance,

and that is sometimes very difficult in developing countries

which have very large informal economies.

The informal economy is a challenge to the effectiveness of minimum wages

and so minimum wage is best looked at not as a single individual tool,

but as one policy in a set of policies that can be more inclusive

and reduce inequalities.

-Yes, because if I was going to put the argument against that,

I would say to you that minimum wages can lead to the export of jobs

to lower-wage areas or countries.

They can maybe increase the size of the black market in labor

by pushing people out of the formal labor market

and they're a constraint on small businesses.

-Yes, that's true, and particularly,

if you set the minimum wage at the level that is too high which doesn't take

into account the economic realities of the country itself.

Minimum wage fixing is a delicate balance between the needs of workers

and their families and economic factors and affordability

because we need sustainable enterprises to create jobs and to create decent jobs.

We always call for very cautious approaches to minimum wages

based on evidence and taking into account different factors

and different perspectives,

and to set in place monitoring systems to see what happens once the minimum wage

is increased or established.

If there is a sense that the minimum wage hurts job growth or competitiveness,

then there is maybe a need to look into the system again.

This being said, the recent Nobel Prize

was handed over to David Card who is an economist

who's done a lot of work on minimum wages

and who's shown that when the minimum wage is set at an adequate level,

it tends to not have any negative effect on employment.

Minimum wages also gives money into the pockets of people

who are going to spend it,

and that is something that we often forget in these economic models

which are sometimes a bit too simplistic.

-Obviously, it's a delicate and subtle tool.

Just run us through quickly a few of the other tools that are around

for dealing with this wage inequality because, obviously,

it's a basket, isn't it?

-Yes, I think it's only through a combination of several tools

that you end up being able to reduce wage inequality in a substantial manner.

Collective bargaining and wage bargaining is certainly

perhaps the single most important instrument

because it's a way of ensuring that productivity gains

are reflected in wage gains.

That when enterprises or a sector is doing well,

then there is a possibility for everybody who is engaged

in that enterprise or in the sector,

all the workers to receive a fair share of the fruits of progress.

That's also what helps create a strong middle class,

which has good purchasing power and is able to sustain the economy.

Collective bargaining, I think is a tool which needs to be used, otherwise,

you will have a minimum wage and lots of people have the minimum wage

and tend to have very polarized wage distributions.

-What about things like equal pay initiatives

and pay transparency initiatives or indeed legislation?

What about things like that?

-Absolutely, very important as well.

In particular, when it comes to the issue of eliminating the gender pay gap,

we have calculated that across the world,

globally, women are paid about 20% less than men.

We've also been looking at why this is the case.

In the past, there was a lot of assumption

or arguments that it was because women have lower levels of education

or they have less skills and there are less training,

but that's not the main reason anymore.

What we found is that there is an element of course that that is impossible

to explain and perhaps relates to discrimination.

Certainly, there's discrimination in the labor market.

There is also occupational segregation with women working

in some particular occupations and men in other occupations,

and so there is a tendency to undervalue these occupations.

That's also been the case, in particular, of the health sector,

which has been very visible during the times of COVID,

and so equal pay initiatives and laws and also initiatives

to ensure pay transparency can be very helpful in that regard.

These are some of the tools,

then you have also public sector pay, how wages of people are protected,

ensuring that people not being paid on a regular basis every month or so.

All these elements which can be used in order to promote equitable distribution

of wages but then, of course, underlying this,

there's also ensure of skills and education.

We have to make sure that vulnerable groups

have access to education because without education

in the modern world in which we work,

it is very difficult to get very productive jobs.

I think that will be the case more and more in the future

where without being able to handle technology,

you will be penalized in the job market.

-Yes, it's obviously a very complicated and difficult issue to resolve,


Patrick, thank you very much for taking us through that.

That was Patrick Belser, senior economist and wage expert at the ILO.

That's all we have time for in this edition

of the ILO'S Future of Work Podcast.

Please join us again soon for another discussion

on key questions on the future of work.


Global wages in times of COVID-19