Eurozone wage increases may be smaller than they appear

The preference for temporary increases may be frustrating for workers struggling with a cost-of-living crunch, but it will be welcomed by European Central Bank policy makers who fear a self-reinforcing spiral between wages and inflation.

8%, inflation is so high that families quickly lose their purchasing power. So it is only a matter of time before they stop asking for wages, emboldened by record unemployment and an increasingly painful labor shortage for businesses.

Spending their extra money will in turn raise inflation, just as the European Central Bank is trying to bring it down to 2%.

Meanwhile, employers are trying to resist sharp wage increases as they see the war in Ukraine as dampening economic growth and cling to hope that the current rise in energy-supported inflation will be temporary.

On the surface, the data appears to suggest that employers and the European Central Bank are slowly but surely losing this battle: negotiated wages rose 2.8% in the first quarter. This is its fastest pace since the beginning of 2009, driven by a 4% rise in Germany, the largest of the 19 economies that make up the eurozone.

But once one-time payments are excluded, the German increase was only about 2%, indicating that companies paid to relieve the pain of inflation and the pandemic for their employees, but to a lesser extent, in a limited way that should not perpetuate inflation.

It is clear that companies from Italy to France and the Netherlands are taking similar measures, mitigating the risk of it becoming a hard hike in wages.

About 15,000 workers at Amsterdam’s Schiphol airport will get an extra 5.25 euros an hour over the summer to ease a severe staff shortage that has forced airlines to cancel hundreds of flights this spring.

In France, President Emmanuel Macron’s government is actively encouraging companies to relieve their employees of inflation with various tax-free bonuses, such as extras to help pay for transportation to work.

And in Italy, where wage growth remains weak, some companies are paying big one-off bonuses to offset inflation and fend off demands for higher wages.

Spectacle maker Luxottica recently offered its employees a pre-tax bonus of 3,800 euros, and its smaller counterpart De Rigo gave a 1,000 euros bonus to employees making less than 40,000 euros a year.

Other major Italian companies that have adopted the same strategy include shoe maker Geox and brake maker Brembo.

“Employers have pulled out and don’t want to reopen negotiations,” said Boris Blazy, wage negotiator at the French union CGT. “So the workers gave up and gave up.”

Germany’s IG Metall union made headlines last month when it demanded an 8.2% wage increase for steel workers, but employers rejected the request, instead offering a one-time wage and eventually launching a strike.

The war in Ukraine is another factor holding back wage growth, as bleak forecasts and growing rumors of a possible recession make people fear for their jobs.

“In upcoming wage negotiations, uncertainty about the development of the economy and concerns about potential job losses may dampen wage increases,” the Bundesbank said.

A matter of time

But beyond a sharp contraction in the economy, the resumption of euro wage growth is only a matter of time, as new EU minimum wage rules will likely accelerate this.

Unemployment is at an all-time low, while employment is close to record levels — Germany alone is short of 558,000 workers, according to the German Economic Institute.

The staff shortage is most acute in the service sector, particularly tourism, where workers have been laid off during the pandemic and where companies are now scrambling to replace the workforce.

“In the hotel and restaurant sector, higher salaries will be offered due to a shortage of workers,” Ignacio Conde Ruiz, professor of economics at the Complutense University of Madrid, said of the event. Spanish economy.

“However, a more structural solution is needed, such as hiring foreign workers.”

The European Central Bank has always maintained that 23% wage growth is consistent with an inflation rate of 2%, which is its medium-term goal.

Few expect wages to accelerate beyond this range, especially as stagnating economies in the southern bloc will offset faster growth in countries such as the Netherlands, Belgium and Germany. But there is also a growing risk that persistent inflation will eventually give unions the ability to start demanding larger payments.

“We expect further increases over the next few quarters, but not enough to offset inflation, which would lead to negative real wage growth,” Morgan Stanley said.

“However, an acceleration in nominal wage growth should support core inflation over the longer term, and make services the main driver of our 2023 outlook.”

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