How big is the global pay gap?

Published on 27 June 2012 5 comments

By John Hawksworth and Yong Jing Teow


Relative wage levels are a key factor in business location decisions, but until now there was a lack of decent comparable data on wage levels beyond the OECD countries. The International Labour Organisation (ILO) has addressed this recently by producing estimates of average monthly wages* for 72 countries including most of the major emerging and developing economies – see BBC report here.

The ILO estimates were for 2009 and expressed in purchasing power parities (PPPs), which corrects for price level differences across countries and so gives a better idea of relative living standards in real terms. However, businesses need the most up to date information and have to trade at current market exchange rates (MERs), so we have updated the ILO wage estimates to 2011 and expressed these in US dollars using average market exchange rates for that year. For the individual countries in the G20, which account for close to 80% of world GDP, our updated 2011 wage estimates are summarised in the chart below.

Average-monthly-wage

The first striking point is that Australia comes out top by some margin with an average monthly wage (pre-tax) of around $4,470. That largely reflects the relative strength of the Australian dollar, which in turn relates to the country’s strength as a commodity exporter, feeding off rapidly rising demand from China and other emerging economies in the Asia-Pacific region. This has led to a kind of ‘resource curse’, pushing up Australia’s exchange rate and so making its non-commodity exports less competitive. Its place at the top of the table is therefore not an unmitigated blessing.

After Australia come the G7 economies. Except for Italy, which is somewhat lower, these are bunched together at around $3,400-$3,800 per month. The UK is currently at the bottom of this bunch, but the difference from the US, Germany, Japan or France is small relative to the margin of error of any such average wage estimates. Despite the fall in the pound since 2007, it is therefore not clear that the UK has any particular competitive advantage in attracting mobile FDI flows just based on its lower labour costs, even relative to its G7 peer group (let alone emerging markets).

Below the G7 there is a marked drop to South Korea, which has not quite bridged the gap to the major advanced economies, but is well ahead of the middle income emerging economies. The latter range from Turkey at around $1,500 per month (though this is only for manufacturing) down to Brazil and Russia at around $1,000. South Africa is surprisingly high in this middle income group at around $1,450 per month, but this may reflect methodological differences as the data for that country exclude agricultural and public sector workers, which are generally included for other countries.

Below Brazil (and Argentina) there is a further marked drop to China and Mexico, both of which have average wages around the $500 per month mark, although in China in particular this would vary greatly between a relatively affluent city like Shanghai and much poorer rural areas. Certainly the dynamic in China has been for average wages to rise rapidly in recent years, making the country more attractive as a consumer market but progressively less so as a cheap manufacturing base. However, there is still a very long way to go before China’s labour costs come anyway close to those in the advanced economies.

Below China there is a further big drop to Indonesia ($160 per month – manufacturing only) and India ($132). Outside the G20, the Philippines is also in this low wage group (around $170) as is Pakistan (around $120). If these four relatively populous countries can get their institutions and infrastructure right, they could become the next major cheap manufacturing hubs as China moves up market. The gap between wages in these countries and the advanced economies remains huge and seems unlikely to be bridged even by the middle of this century on plausible assumptions. So the UK and other advanced economies will need to focus on tradable sectors that are based on distinctive skills and capabilities, primarily high value added services and R&D-intensive sub-sectors within manufacturing.

*Wages are defined here as gross remuneration, including bonuses, but excluding employer social security contributions and benefits in kind. The data generally cover all sectors of the economy for the G20 except for South Africa, Turkey and Indonesia (as noted in the text above).

Contact:

John Hawksworth  |  Tel: +44 (0)20 7213 1650

Yong Jing Teow  |  Tel: +44 (0)20 7804 4257


«UK jobs – good news amidst the gloom | Homepage | Is the UK lagging behind other G7 economies? »

Comments (5)

Leyla Yildirim commented:

It would be interesting to look at the employment tax costs for companies alongside this wage data.

Justine Brown commented:

Would be interesting to see total pay & benefits costs eg including Healtcare, employer pension costs, employer social security etc - all of which add costs on top for the employer.

Andrew Sentance commented:

Justine Browne and Leyla Yildirim both highlight a very good point - the total cost to the employer of labour includes various non-wage labour costs, including taxes, pension contributions and health insurance. The US Bureau of Labour Statistics publishes comparisons of labour costs for manufacturing industry which include these costs and you can access these on their website at: http://www.bls.gov/news.release/ichcc.toc.htm. These figures are not as up to date as ours - they relate to 2010 - but will give an indication of how the picture changes when these non-wage costs are added in.

John McKinley commented:

Why are there only 19 countries listed?

John Hawksworth commented:

Dear John

Thanks for your comment. We presented a selection of major developed and emerging economies for which consistent data were available.

John Hawksworth

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