This is the big dilemma at the moment: with prices rising, the question of wages has been raised again throughout the eurozone. The European Central Bank (ECB) wants wages not to rise too much to prevent rising demand leading to acceleration of inflation. This “price-wage loop” would be hard to calm, economists say. Governments are in a state of schizophrenia.
They would prefer wages not to rise too quickly. They want to avoid companies losing their competitive edge and forcing the European Central Bank to raise interest rates sharply. This could frustrate the recovery and even cause a recession. Therefore, they prefer measures such as checking inflation, capping electricity prices or lowering fuel prices. In practice, the state bears part of the cost of inflation.
But governments are well aware that if wages do not rise over time, the risk of a social explosion looms. Stagnation or social upheaval, either of these two pitfalls is undesirable, especially in times of war.
Wages are still wise
For now, wages remain relatively prudent in the eurozone. “If we only focus on the wage agreements that have been reached since the start of the year, these suggest wage growth of about 3% in 2022 and 2.5% in 2023,” the chief economist at the European Central Bank, Philip Lane, said last month. But there is little chance that this moderation will continue. “It hasn’t happened yet but it will happen: there will be to some extent wage compensation” for observed inflation, Philip Lane himself said last week during a seminar organized in Paris by the Center for Economic Policy Research (CEPR).
Indeed, as Philip Godin, an economist at Barclays notes, “The labor market is tight in the eurozone and employment difficulties are emerging. Unemployment has bottomed at 6.8%. Inflation is high and now exceeds 8%. So there is necessarily a need to compensate employees.” It is clear that wage moderation will not be possible any time soon.
Inevitable salary increases
Economists at Citigroup expect inflation to average 7.5% this year in the eurozone, peaking at 9.5% in September. However, in the eurozone, the development of inflation is taken into account in salary negotiations for only 18% of employees. Barely 3% of private sector salaries are directly tied up. In Greece, for example, inflation is at 10% and wages will only rise by 3% this year. The loss of a standard of living will be difficult for many Greek families.
For Philip Wachter, chief economist at Ostrum Asset Management, raising wages is part of the solution, especially in a world where regional conglomerates are transforming themselves and where global competition can decline. We can no longer count on the American or Chinese consumer. European growth should be more independent. And for this, domestic demand must be more robust, which means higher wages. Many companies can. Their earnings soared after the pandemic with the help of the state. Without an ideal wage index against inflation, there is room for maneuver that does not put companies at risk,” he argues.
Bonuses and price controls
Others are more careful. Thus, economist Jean Pisani-Ferry prefers that firms give bonuses. This would preserve their future earnings in the event of a recession in the coming quarters. Energy prices can drop rapidly. For his part, Julien Marcelli, chief economist at Global Sovereign Advisory, advocates bonuses but also “temporary price controls despite the immediate cost to the budget”, such as capping the price of electricity, to prevent households from anticipating higher inflation and increased demand for wages. He also advocates the possibility of “removing the mechanisms of benchmarking when they are harmful to the consumer in times of high inflation, such as rents for example”.
Whatever the case, we will have to open the debate in France and the Eurozone. How is the cost of inflation distributed between households and firms? Neither party will be able to bear the entire bill.