The true value of a paycheck: Understanding PPP-adjusted income statistics - ILOSTAT (2024)

PPPs provide a standardized metric to assess the relative purchasing power of different economies, adjusting for price-level differences. This adjustment is vital because traditional exchange rate-based comparisons often do not accurately reflect the true economic size and purchasing power of different countries. That is, price levels are generally higher in high-income countries and lower in low-income countries. Thus, comparisons of GDP based on exchange rates, which fail to adjust for these price-level variations, typically inflate the economic significance of high-income countries while diminishing that of low-income countries.

The release of updated PPPs comes at a pivotal time, following the economic disruptions caused by the COVID-19 pandemic. PPP-based metrics provide a stable foundation for assessing inflationary impacts, offering insights into how different economies have adjusted amidst fluctuating price levels. Coordinated by the World Bank, the ICP is among the largest global statistical initiatives. The 2021 edition marks its tenth comparison since inception in 1968, and currently covers 176 economies.

According to the latest ICP data, the global economy’s PPP-adjusted value in 2021 was $152 trillion. China led with 19 per cent of global GDP in PPP terms, followed by the United States at over 15 per cent and India at 7 per cent.

Middle-income countries increased their collective share to 53 per cent, reflecting their rising economic influence, while high-income countries’ share decreased to 46 per cent of global GDP. Low-income countries represent just 1 per cent.

The ICP also highlighted significant differences in living standards, with three-quarters of the world’s population living in countries where average living standards fell below the global mean in 2021.

To further understand economic disparities, we can examine how wages compare across countries when accounting for the cost of living. By analysing PPP-adjusted statistics, we gain a clearer picture of the real value of a paycheck across countries in different income groups.

For example, a comparison of monthly earnings shows that these figures are highest in Luxembourg, Switzerland, and Iceland, all exceeding $6000 per month when converted to US dollars using exchange rates. However, when these earnings are adjusted for purchasing power parity, Belgium, the Netherlands, and Germany join Luxembourg with PPP-adjusted monthly earnings above $6000 (PPP). This means that workers in Belgium, the Netherlands, and Germany have higher purchasing power for each unit of currency compared to their counterparts in Switzerland and Iceland, because they face lower prices for goods and services. That is, the actual value of those earnings—what workers can buy with their wages—is higher in the former group of countries.

A similar analysis can be made with monthly minimum wages. European nations continue to have the highest minimum wages when measured in US dollars. However, the rankings shift depending on whether the figures are converted using PPPs or exchange rates. As expected, in some high-income countries, the PPP adjustment reveals that the real purchasing power of wages is lower than what the nominal figures suggest, indicating a higher cost of living.

Take Switzerland and Iceland, for example. They boast the highest minimum wages¹For countries without a national minimum wage, such as Switzerland and Iceland, the minimum wage data reflect the wage that covers the most workers. For example, a regional minimum wage (e.g. Switzerland) refers to the capital or largest city/region, while a sectoral minimum wage (e.g. Iceland) refers to the sector with the highest employment. Please refer to the database for additional context.of $4221 and $2720 per month, respectively, when using exchange rates. However, due to high prices in these countries, the PPP-adjusted figures drop to $3447 (PPP) and $2396 (PPP). As a result, Luxembourg and Germany climb the ranks to take second and third place when using PPP dollars, each with monthly minimum wages exceeding $2700 (PPP).

Meanwhile, the narrative is reversed in low- and middle-income countries. PPP adjustments typically show a significant increase in monthly minimum wages, reflecting lower price levels and cost of living. In 74 out of 96 low- and middle-income countries with available data, PPP-adjusted minimum wages are at least double the unadjusted amounts. The difference is even more pronounced in countries like Egypt, India, and Pakistan, where the adjusted figures are as much as quadruple the nominal wages.

This highlights the importance of considering local cost structures when comparing income-related statistics across different countries. Using PPP-adjusted figures provides a more accurate picture of economic conditions than simply using exchange rates.

The integration of updated PPPs into data on ILOSTAT enhances our data accuracy and relevance. We are committed to providing our users with the most up-to-date and insightful indicators available, empowering them to make informed decisions and drive impactful outcomes.

Explore the income-related statistics on ILOSTAT today and discover how these enhancements can enrich the understanding of labour market dynamics. The updated ILOSTAT data includes indicators on minimum monthly wages, hourly earnings, monthly earnings, and labour costs. Additionally, the latest update features 11 new tables that break down earnings data by age, education, disability status, rural/urban areas, and marital status, offering an even more comprehensive view of the labour market.

Another major data update with preliminary exchange rates and PPPs for the reference year 2024 will occur in the fourth quarter of 2024. Also stay tuned for the December update of the ILO Modelled Estimates (ILOEST) database, which incorporates PPPs for working poverty and labour productivity figures.