economy

Eurozone wage growth is expected to be "very strong" this year, beating historical records and partially canceling inflation that has been derailed since 2021, according to a European Central Bank (ECB) paper published today.

"Wage growth over the coming quarters is expected to be very strong relative to historical trends," said the authors of the article published in the monthly bulletin of the monetary institution.

This increase will reflect "some convergence between wages and increased inflation rates" seen from 2021, they point out.

As ECB economist Philip Lane explains, monitoring wages will be a big part of understanding the trend in inflation. According to him, it will take several years for wages to fully adjust to the recent crises.

Pressures and worries

In the eurozone, the annual increase in consumer prices fell below the symbolic 10% mark in December after a year and a half of continuous increases.

But due to the undermining of wages by prices, today "real wages are much lower" than in 2019, "before the pandemic" of Covid-19, the authors of the article explain.

In the second quarter of 2022, the rate of annual real wage growth was negative, at -5.2% in the euro area, according to their article.

This could lead unions "to demand larger wage increases in future bargaining rounds," particularly in low-wage sectors, the authors add.

In Germany, the service workers' union Verdi is currently demanding a 15% pay rise for around 160,000 workers at postal giant Deutsche Post and 10.5% for the 2.5 million federal state civil servants and of communities.

The strong wage increases that will be given will also reflect the good health of the labor market, despite the economic slowdown, EKT estimates.

In its paper, the ECB said that "there are signs of stronger wage growth in the services sector", particularly among those lacking staff.

Gross wages in the eurozone have risen by 4.5% in 2022 and are expected to rise by 5.2% this year, according to the latest ECB forecasts.

In the medium term, "downward pressure" will again weigh on wage growth due to the economic slowdown and uncertainty amid Russia's war in Ukraine, the authors of the ECB paper conclude.

"Labor markets have so far been largely unaffected by the economic slowdown, increases in the national minimum wage, and some coverage between wages and high rates of inflation," the authors report.

A shortage of skilled labor encourages businesses to keep workers and pay them well.

With forecasts suggesting 2% inflation will be an elusive target by the end of 2025 and unions pushing for generous compensation packages, the ECB made an unprecedented series of rate hikes that lifted the deposit rate to 2% last month.

In fact, ECB President Christine Lagarde recently signaled that (at least) another half-point increase is on the way at the February meeting, as wages are rising at a faster pace than forecast.