Shrinking Wages And Future Stability: Are They Related?

Citing the International Labor Organization’s (ILO) newly released Global Wage Report, Al Jazeera states that real wages have fallen -0.9%. Although productivity is rising, Al Jazeera reports that parts of Europe, America, and Africa have all been plagued by shrinking real wages. Al Jazeera also postulates that the regions where real wages grew were “largely driven by job losses among lower-income workers.” Al Jazeera quotes ILO Director-General Gilbert F. Huongbo’s warning that rising economic turmoil, including rising inflation caused by supply-chain issues linked to the pandemic and Russia’s war on Ukraine, could exacerbate “inequalities” and “social unrest.” 

For context, the 2022-23 Global Wage Report is an in-depth empirical research paper written by ILO staff analyzing how COVID-19 (and eventually Russia’s war in Ukraine) has affected wage earners around the world. In addition to identifying the shrinking purchasing power of wage earners due to inflation, the report discovered that “lower-income earners are the most impacted,” and that “wage employees lost 6 weeks of wages,” but that “minimum wages and social dialogue” will be critical in averting further upset. 

Although inflation affects everyone, the ILO report states lower income households suffer more of the economic burden because “such households spend most of their disposable income on essential goods and services.” In economics, the “Law of Demand” means that the higher the price of a good, the fewer people will purchase and want it. Essential goods and services — things like food and gasoline — do not follow this law because they are inelastic, which means their price is not easily affected by demand. This is because people cannot choose whether or not to buy these items like they could a movie ticket. People need to eat food, they cannot cut that expense out of their lives, which means if it now costs half a paycheck to not starve to death (instead of a quarter of one’s paycheck) one now has to spend more money to stay alive. People with higher incomes have the option to trade off what they spend their money on, such as cutting expenses by not buying expensive non-essential goods (like movie tickets) in order to make up for having to spend more money on essential items. People with lower incomes do not typically have this option. 

The ILO report also found that wage earners lost about six weeks’ worth of wages between 2020 and 2022. Using data from 28 countries, the ILO report writers figured out how much money was spent on wages in 2019 (the control) and subsequent years (the results of the variables in play). They found that “20 of the 28 countries… experienced a decline in the total real wage bill relative to 2019.” This indicates that wage earners lost money while also having to pay more money for essential goods and services during this period.

To recap, the ILO report discovered that wages around the world are rapidly losing purchasing power. Unfortunately, wage earners also suffer the most when inflation is high because they tend only to buy essential goods which are inelastic and do not have other avenues in which to save money. To top it off, wage earners also lost about six weeks’ worth of wages over the last two years. This means workers around the world are now in a worse financial situation than they were before 2020 and that without major policy reformation and support, economic inequality will continue to grow. 

 In the Al Jazeera article, ILO Director-General Gilbert F. Huongbo warned that if “income inequality and poverty” continue to grow unchecked they “could fuel further social unrest across the world and undermine the goal of achieving prosperity and peace for all.” But are poverty and economic inequality linked to civil unrest and faltering security? The answer is complicated.

Poverty and income inequality have long been linked with a myriad of social, economic, and political conditions including but not limited to adverse health outcomes, low levels of literacy, crime, and even civil war. Despite these and similar relationships though, economic inequality and poverty have not yet been proven to be directly linked with civil unrest, extremism/terrorism, or other threats to national security and human rights. 

A research paper written by an academic researcher and experts at the World Bank — Pablo Fajnzylber, Daniel Lederman, and Norman Loayza found that “income inequality, measured by the Gini Index, has a significant and positive effect on the incidence of crime” and that “faster poverty reduction leads to decline in national crime rates.” Although economic inequality is not directly linked to national security, it is directly linked to crime. The majority of crimes committed by people in the lower classes are done out of necessity. However, an increase in small-scale, individual crime may encourage an environment in which larger crimes are more normalized. Organized crime can be directly linked to national security and human rights abuses. A UN report from 2010 named “The Globalization of Crime: A Transnational Organized Crime Threat Assessment” found organized crime, including piracy, cybercrime, illegal smuggling, and human trafficking, to be a threat to stability, particularly in countries already struggling with violence and corruption. 

Similarly, scholars have been unable to directly link poverty and economic inequality with terrorism — but most experts agree that some join terrorist organizations because of feelings of disenfranchisement. An article from the American Psychological Association cites research conducted by the director of the Pennsylvania State University’s International Center for the Study of Terrorism, psychologist John Horgan, Ph.D. as having found, after about 60 interviews with former terrorists, that people who are radicalized might “feel angry, alienated, or disenfranchised. Believe that their current political involvement does not give them the power to effect real change. Feel the need to take action rather than just talking about the problem,” and more.

Unfortunately in some modern-day political systems, including those of western democracies, money talks and money holds the power. The interests of the rich seemingly get more attention and support than those of the poor. Over time the lack of representation of the middle and lower classes can create feelings of disenfranchisement and anger which are connected to radicalization. Therefore, economic inequality is not directly connected with terrorism or extremism, but it can cause feelings that others have reported having that motivated them to join radical groups. 

To summarize, the relationship between economic inequality and sociopolitical stability is complicated. Scholars have yet to prove there is a direct correlation between poverty and civil unrest. But there are indirect relationships that link the two — like poverty’s correlation with crime rates and crime’s relationship with instability, and money’s correlation with political power and political power’s relationship with feelings of disenfranchisement and terrorism. Economic inequality, human psychology, violence, and national security: it’s all a big web social scientists might never fully unweave. It’s like asking what came first: the chicken or the egg, social unrest or poverty?

Maybe the best answer comes from a blog post from the World Bank written by Francisco Ferreira and Marta Schoch. In their article, they search for a link between the 2019 civil uprisings in South America and the growing inequality. Ultimately they find none. Instead, they find a potential connection between the protests and frustration at “severely incomplete and insufficient” progress in eliminating inequality. 

The report from the ILO indicates the world is facing a growing economic problem that is burdening the middle and lower classes. High inflation and lost wages are worsening economic inequality. Director-General Huongbo warns that leaders will need to take action soon to curb the growing inequality or civil uprisings will increase. Although there is no direct connection between poverty and instability, that doesn’t mean a relationship doesn’t exist. Economic inequality is directly linked to crime, feelings of disenfranchisement, and more which can pave the way for instability and violence to reign. Civil unrest aside though, leaders should be trying to fix the economic crisis anyway because food, housing, shelter, and healthcare are things every human deserves. Sociopolitical instability isn’t the only threat facing us when financial hardships arise. 


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