How can Wages increase in practice?

Although nominal wages rose sharply in the 1980s, high inflation did not allow for an increase in real terms. Over the past decade, the average real wage has been on an upward trend, but then the Covid-19 pandemic and high inflation created strong pressures on incomes. The growth of economies today supports significant wage growth for skilled labor market segments as well as for large segments of unskilled labor where there is a supply deficit. But for other workers the wage increases do not cover the price increases.

On average, the path of wages in an economy cannot systematically deviate from labor productivity. The main reason why wages in one country have not increased in recent decades as much as in other countries is precisely because productivity moves lower.

Productivity, in turn, depends mainly on investments and the functioning of institutions in the area of production and markets. In this way, the prospect of a significant increase in real wages exists only to the extent that productivity increases. From another point of view, when the production is not done with modern technology and is not aimed at cutting-edge markets, it does not create significant added value.

And the other dimensions of the problem

The tax and social security burden on the salaries obviously affects the net earnings regardless of governmental interventions. Since wage labor has a high burden on middle and higher wages, then this also affects the increase in real wages. As a result, a significant part of the work is done informally to the detriment not only of public revenue, but also of overall productivity.

But when there is a large gap between the costs to businesses and the net wages of workers, the creation of high value-added jobs is not easy.

Any increases, governments announce, in the minimum wage which are intended to correct the loss of income caused by increased inflation in these incomes significantly protect those working at this level. But at the same time they intensify the problem of wage compression, as the further increase of higher wages cannot and should not be done by administrative measures. To increase the wage scale overall, as desired, new jobs of higher added value should be created. Such a systematic rise in wages would also reverse the course of migration of workers, who would find another country more attractive to work.

The perennially low level of investment also affects the level of competition with a double effect on real wages. When there is no incentive to attract or retain workers from competitive positions, the wages offered will inevitably be lower. At the same time, with low competition in the labor market, there are higher prices for goods and services that reduce the purchasing power of wages. In this case, and as long as there is a high level of shadow economy in the economy, the problem is intensified, as the undeclared incomes boost demand and raise prices for everyone without exception.

The well-being of citizens in an economy depends heavily on the jobs and wages it offers. To the extent that in the coming years the shift to a production model based on the production model we mentioned is strengthened, the increases in real wages can be large and systematic. However, this presupposes a strengthening of production that is innovative and extroverted in nature, thus creating high added value jobs and a relative reduction of this type of production that moves introverted. If this shift towards an innovative and extroverted production is not strengthened immediately, a substantial increase in real wages cannot occur in the economy under examination.

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