Salaries

Wage growth in the coming quarters will be “very strong relative to trends” in the Eurozone. The affirms it European Central Bank (ECB) in an Economic Bulletin which analyzes thewage trend and its determinants since the beginning of the pandemic. The expectation of strong wage growth rests on the strength of labor markets, which so far have not been substantially affected by the economic slowdown, the increase in national minimum wages and some recovery between wages and high inflation rates .

“Beyond the short term, the expected economic slowdown in the euro area and the uncertainty about the economic outlook are likely to exert downward pressure on wage growth”, it is however underlined.

Pandemic effect

Frankfurt economists recognize that the COVID-19 pandemic and government measures to cushion their impact have caused exceptionally high volatility in wage growth indicators, which makes their performance more difficult to assess. Analyzing the volatility of the past two years, the levels of key wage indicators – such as compensation per employee and hourly wages – are currently slightly higher than those implied by long-term pre-pandemic trends.

Looking at the pandemic-related distortions in wage measures, which have varied widely across sectors, the ECB says there are signs of stronger wage growth in the service sectors. “Wages are above pre-pandemic levels mainly in those service sectors that have recently experienced severe labor shortages,” the document reads.

Inflation variable

Taking into account the impact ofinflationhowever, real consumer wages are now “significantly lower than before the pandemic”. Indeed, nominal wages have increased at a slower pace than the consumer price index, resulting in a decrease in the purchasing power of wageswhich in the second quarter of 2022 was approximately 3.6% below the level of the fourth quarter of 2019. In the period starting from the fourth quarter of 2019 to the second quarter of 2022, employees experienced an average quarterly reduction of their real wage level before the pandemic by around lo 0.5%.

The further losses in real wages expected in the coming months will be “increasingly perceived by consumers as a loss of purchasing power compared to before the pandemic”, reads the Bulletin. This could increase pressure on unions to demand higher wage increases in upcoming rounds of negotiations, especially in lower-wage sectors, according to the ECB.

However, “purchasing power losses are only one of the factors influencing unions’ wage demands: labor market rigidity and the current economic situation are also likely to play a central role”, it is highlighted.