One of the reasons I do not look at wage growth in the Euro area more often is that the data available is usually well behind the times. But a research paper from the Central Bank of Ireland has brought things more up to date after first agreeing that the official data is less helpful than in might be.
To track wage developments, the ECB uses national accounts data on workers’ compensation and data on negotiated wages, neither of which are perfect. For
example, national accounts data is only available at a considerable lag of 90 days.Negotiated wage data could be more backward- than forward-looking, given the lengthy time periods over which negotiations tend to take place. Finally, negotiated
wages are not available for all euro-area countries.
But for the fact we are looking at Euros I would say that such numbers are a dollar short and a day late.
Instead they have tried this to bring things more up to date.
We track wages posted in job ads on Indeed in six euro-area (EA) countries — France, Germany, Ireland, Italy, Netherlands and Spain — and the UK. When we quote ‘euro-area’ figures, we’re referring to the employment-weighted average of these six countries.
So we have the four largest economies, themselves ( Ireland) and the Netherlands. This means it should be pretty representative.
The euro-area countries account for 81% of total
euro-area employment.
What results did they get?
Wages growth has been picking up.
Our initial analysis, conducted through the end of October 2022, found that growth in euro-area posted wages accelerated sharply in the first half of this year, from 2.5% in January to 4.2% in June and continued to accelerate during the third quarter. The first growth spurt coincided directly with the re-opening of economies after the pandemic. That growth continued in October 2022 — average year-on-year euro-area wage growth in our tracker was 5.2%, more than three times the 2019 average of 1.5%. But not all growth is created equal.
Intriguingly we do have something of a wage-price spiral here as wages have been pulled higher by the rise in inflation. Although care is needed as they have been doing so from below and have never caught up. Nonetheless wage growth has trebled.
I do not think that this is the win that they believe it to be but we should not reject the numbers past on ECB past performance.
This acceleration in wage growth is consistent with ECB expectations for average wages to grow at rates well above their pre-pandemic trend in the near term……
In the ECB September 2022 projections, compensation per employee was projected to grow at 4.8% and 4.0% in 2023 and 2024. This compares with an average annual growth figure for 2017-19 of 2.0%.
We can break that down for individual countries.
Among the euro-area countries we analysed, October
wage growth was highest in Germany (7.1%), followed by France (5.0%), Ireland (4.7%), Italy (4.2%), Netherlands (4.0%) and Spain (3.5%).
As it stands the growth in everywhere but Germany seems to be slowing.
Germany is the one country we studied where year-on-year wage growth has not yet decelerated.
But the growth has broadened out.
Since the low point of the pandemic in early 2021, when posted wages were growing at a rate of 3% or higher in
fewer than 40% of occupational categories in the euro area, the share has broadened to over 60% in October.
There is also something hopeful in the numbers as it looks as though the lower-paid are particularly benefiting from the rises.
The pandemic shifted the landscape. Six categories are in the euro area top 10 in both 2019 and 2022: cleaning and sanitation, food preparation/service, customer service,
loading and stocking, retail and installation and maintenance. Nevertheless, in each of those six categories, wage growth has risen substantially since the pre-pandemic period.
In case you were wondering why 3% growth is being used as a type of benchmark it is because it has become a sort of central bank “castle in the sky”,
A 3% nominal wage growth threshold would be consistent with 1% productivity growth, plus the 2% inflation target (see Lane, May 2022).
Real Wage Growth
If we take these estimates at face value then we immediately have a problem as we note the October inflation figures.
Euro area annual inflation is expected to be 10.7% in October 2022, up from 9.9% in September according to a
flash estimate from Eurostat, the statistical office of the European Union.
So wage growth is lagging inflation by around 5% ( literally 5.5% but I think that is spurious accuracy). If we look at individual situations I fear for the Baltic states all of whom have inflation around 22% and wonder about both wage growth and real wage growth there?
Returning to the countries we do have then for real wage growth we have Germany ( -3.5%), France ( -2.1%), Ireland ( -4.9%), Italy ( -8.6%), Netherlands ( -12.8%), and Spain ( -3.8%)
Poor old Italy! Although in this instance the Netherlands has cruised past it in a race no-one wants to win.
Unemployment
When one is looking at wage growth the unemployment rate provides a perspective. So let us take a look.
In September 2022, the euro area seasonally-adjusted unemployment rate was 6.6%, down from 6.7% in August
2022 and down from 7.3% in September 2021. The EU unemployment rate was 6.0% in September 2022, stable
compared with August 2022 and down from 6.7% in September 2021. These figures are published by Eurostat,
the statistical office of the European Union.
Whilst the situation has improved ( 7.3% a year ago compared to 6.6% now) we are left wondering if this is as good as it gets? But more than that as there were all sorts of theories in the past about full employment ( with implications for wage growth) and NAIRU ( the Rate of Unemployment which gives Non-Accelerating Inflation).
I counsel caution with exact numbers as for both theories they have proven to be wrong. But there are principles behind them and we now have higher wage growth at what are internationally high levels of unemployment. Indeed the comparison between the Euro area and EU is flattered by the departure of the UK.
Comment
The numbers in the research paper add to the debate, But as they stand they confirm one of my 2022 themes which is that real wages are falling substantially with my suggestion being an annual rate of between 4% and 5%. That is the driving force of the cost of living crisis and is putting downwards pressure on economies that will be felt as 2022 moves into 2023.
As to the latest research it will be interesting to see how it stands the test of time but does offer the initial benefit of being more timely. But the number of postings does varying with for example the Netherlands being strong and Germany poor so maybe that has influenced the numbers as some countries may be reading marginal ( likely to be higher) rather than median offerings.
Finally I think the Financial Times will be hoping that this part of its own article gets missed out.
Wage growth has been more modest in the eurozone than in the US and UK, where unemployment rates are lower and post-coronavirus pandemic labour shortages more acute.