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OECD Says Developed Country Wage Growth Picked Up
Source: nasdaq.com
Source Date: Thursday, March 20, 2014
Focus: ICT for MDGs, Citizen Engagement
Created: Mar 25, 2014

Pay in developed economies grew at a slightly faster pace during the fourth quarter of 2013, but at a rate that indicates a key source of inflationary pressure remains weak, according to figures released by the Organization for Economic Cooperation and Development Thursday.

The Paris-based OECD said that across its 34 members, pay rose by 0.5% in the three months to December, having risen by 0.4% in the previous quarter. Productivity rose by 0.4%, resulting in a 0.1% rise in unit labor costs.

Rising labor costs can be a source of inflationary pressure as businesses respond by increasing prices to protect their profit margins. The OECD's figures suggest there is unlikely to be a significant pickup in inflation during coming months, and will add to concerns that inflation may be too low, with the risk that some major economies could slip into a period of deflation.

In January, the rate of inflation across the world's largest economies slowed for a second straight month, and was well below 2% in many developed countries, the rate that most central banks see as consistent with healthy economic growth.

When inflation is low, companies, households and even governments have a harder time cutting their debt loads, a particular problem for a number of highly indebted nations in the euro zone. Businesses can see their profit margins squeezed, lessening their willingness to invest and hire workers.

When prices start to fall, consumers can postpone purchases in the expectation that they will get better value for their money in the future. That can, in turn, weaken economic activity and create further deflationary pressures. Following the difficulties Japan has experienced in getting out of its long period of deflation, central banks in other countries are anxious to avoid a similar struggle.

Despite concerns about low inflation, the U.S. Federal Reserve Wednesday said it would wind down its signature bond- buying program by a further $10 billion in April. The OECD said that in the U.S., labor costs rose by 0.1% from the third quarter, as wage growth accelerated and productivity growth slowed.

As well as being a source of inflationary pressure, rapidly rising unit labor costs can also harm an economy's ability to remain internationally competitive, while falling unit labor costs can help improve competitiveness.

The OECD's figures indicate that changes in labor costs that are needed to rebalance the euro zone's economy appear to have continued in the fourth quarter, although at a slow pace.

Many economists and policy makers believe that one of the euro zone's key problems is that wages in southern Europe rose too rapidly relative to wages in Northern Europe in the years after the euro was introduced in 1999.

That made southern European countries less competitive, boosting imports and suppressing exports, with the result that trade deficits and foreign borrowing rose.

Economists and policy makers believe that restoring the euro zone to sustainable growth will require wages in Northern Europe to grow more rapidly than those in southern Europe for some time to come.

The OECD noted that while labor costs in Spain and Italy fell in the three months to December, labor costs in Germany rose by just 0.2%, or half the rate of the third quarter.

However, in Portugal labor costs fell by 6.5% during the quarter, largely reflecting a big drop in wages.

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