UK wages could still be four times higher than wages in India by 2040, despite faster relative wage growth in emerging economies

Feb 05, 2019

  • Rising real wages in emerging markets will make them increasingly attractive for UK exporters in the decades after Brexit
  • India is projected to see the fastest real wage growth of the major economies, up by more than 200% in US dollar terms by 2040
  • Although emerging markets are likely to experience faster wage growth, UK real wages are projected to grow by almost 30% by 2040, assuming a reasonably smooth Brexit

While wages in emerging markets will continue to converge with those in the UK over the next two decades, a significant gap will remain for most emerging economies, according to new analysis by PwC. In 2040, UK real wages could still be more than twice as high as in Malaysia and four times as high as in India.

In the UK, average monthly wages are projected to rise by 29% to around $3,900 (in constant 2017 US dollars) by 2040, up from around $3,000 in 2017, assuming a reasonably smooth Brexit. This is within the same broad range as projected cumulative real wage increases in other advanced economies such as France (21%), the US (22%) and Germany (41%).

A more pronounced catch-up in wages in economies such as China and Poland relative to the UK could result in UK companies choosing to reshore some activities to the UK, or to adopt other strategies such as increased automation where appropriate.

Mike Jakeman, senior economist at PwC, said:

“Although we believe UK wages could rise by almost 30% in real terms by 2040, pay in emerging markets is predicted to grow at a faster rate, meaning the cost of labour in some countries will become less affordable for UK firms. As a result, we expect to see some moving production locations, including reshoring back to the UK in some cases, or turning to automation to complete some manufacturing and simple processing tasks.  

“By 2040, higher wages will also turn some traditional manufacturing locations such as China into increasingly important UK export destinations. This is good news in the context of Brexit. At the moment, UK exports to emerging markets are small relative to those to other advanced economies, but as consumer spending power in emerging markets grows so too will the opportunities for UK exporters.”

Average annual growth in real wages for emerging economies such as India, Malaysia and Indonesia could exceed 4% in the years to 2040, implying cumulative growth of over 200% in the case of India as the table below shows. In advanced economies, real wages are projected to grow more slowly given they are starting from a higher level of economic development. The UK’s projected performance implies cumulative real wage growth of just under 30% between 2017 and 2040, somewhat lower than Germany, where productivity growth is projected to be higher, but somewhat higher than in the US or France.

Projected cumulative increase in average monthly real wages (US dollar terms, 2017-40)

India

222%

Malaysia

184%

Indonesia

176%

China

145%

Poland

141%

Philippines

121%

Mexico

110%

Brazil

73%

Advanced economies

 

Germany

41%

UK

29%

US

22%

France

21%

Source: PwC analysis

John Hawksworth, chief economist at PwC,  added:

“We expect real wage growth to be faster in emerging economies due to a combination of higher productivity growth and real exchange rate appreciation. But UK real wages have the potential to grow significantly faster than over the past decade if we can invest in technology, infrastructure and skills to boost productivity growth in the decades after Brexit.

“Relative labour costs are one important factor when deciding on business locations, but UK companies should also consider ease of doing business and wider measures of competitiveness in different countries. Factors such as complex regulations, corruption and inadequate infrastructure can mitigate the benefits of a cheaper workforce in some emerging markets. A holistic approach is needed when assessing the costs and benefits of different potential locations.”

Ends.

Notes to editors.

PwC used a 4-step method to project wage growth for 21 countries around the world up to 2040, taking into consideration (i) base year wage data, (ii) labour productivity growth, (iii) a wedge between labour productivity growth and real wage growth and (iiii) projected real exchange rate movements. The analysis is based on an updated version of PwC’s long-term global economic growth model, as used in its World in 2050 series of reports.

See the full report here: http://www.pwc.co.uk/iwp

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