Wages in emerging markets will continue to converge with those in the UK over the next 20 years, but a significant wage gap will remain even by 2040. These trends have important implications for UK decisions on investment and export locations.
Movements in wages have a two-sided impact on economies. Higher wages mean higher costs for firms, but they also boost the purchasing power of workers and so stimulate consumer spending. Growth in real wages is an especially import measure of changing production costs for businesses and living standards for workers. For example, in a year where nominal wages increase by 5% but consumer price inflation is 6%, businesses will benefit from relatively cheaper labour costs. But living standards for their employees will deteriorate as prices rise faster than wages.
The global financial crisis of 2008-09 created much higher unemployment around the world. In the decade since the crisis, labour markets have gradually recovered, but the relatively easy availability of labour has meant that real wages fell in many advanced economies. At the same time, real wages have been rising in emerging economies like China. This means that the wage gap between those countries and the UK has narrowed. For businesses in the UK, a key question is how far this narrowing will continue and what that implies for business strategy. International Wage Projections to 2040 projects real wages for 21 countries up to 2040, with a particular focus on the implications of these trends for UK businesses.