The European Central Bank (ECB) confirmed that one of its main fears would be taking shape in the region, the effects of the second round of inflation, which remains at historically high levels in the region, at 9.2% in December. The issuer warned that wage growth in the coming quarters will be “very strong” compared to historical patterns in the Eurozone. The message is launched by its economists in an article in the latest bulletin of the institution, where they also point out the “substantial” loss of purchasing power of consumers due to the impact of the rise in prices – which will continue to soften in the future – thus encouraging demands for wage increases by unions.
“Wage growth in the coming quarters is expected to be very strong compared to historical patterns,” say the economists at the entity led by Christine Lagarde. In this sense, considering that the upward pressures on wages reflect robust labor markets, which have not been greatly affected by the economic slowdown so far. They will also reflect the increases in national minimum wages and surely the recovery of salaries with respect to the high rates of inflation.
Beyond the short term, they believe that the expected economic slowdown for the area and uncertainty about the outlook “will exert downward pressure on wage growth.” At its meeting last December, the Governing Council of the ECB had to raise the reference rates by 50 basis points to 2.5%, its highest level since December 2008. Lagarde, address that, based on the data Rate hikes are necessarily expected “at a rate of 50 basis points over a period of time” because inflation remains too high and is expected to remain above the 2% target.
Taking into account the effect of inflation on workers’ compensation, the document estimates that their salaries “are now substantially lower than before the pandemic” and warns that they are likely to fall further in the coming months. Thus, considering that consumers in the Eurozone will increasingly lose this additional impact as a loss of purchasing power compared to the pre-pandemic situation, which could increase the pressure on unions to demand wage increases in the next rounds of negotiation, especially in sectors with lower wages.
Also, note that the demand for higher wages is not only related to the loss of purchasing power due to inflation, but considering it likely that the tightness of the labor market and the current economic situation will also play a prominent role. In November 2022, the eurozone unemployment rate remained stable compared to the previous month at a record low of 6.5%, according to data published on Monday by Eurostat, the community statistics office.
The unemployment rate in the euro area thus stood nine tenths below the level prior to the pandemic, since in February 2020 unemployment among the euro countries was 7.4%. Compared to the United States, the ECB economists highlight that real wages have been declining in both economies since the second quarter of 2021 and point out that, in the first half of 2022, growth will be more than nominal wages in the euro zone. led to a stronger fall in real wages compared to the United States”.
Specifically, in the second quarter of 2022, the real annual growth rate of the US labor cost index was -3.3%, while for negotiated wages in the euro area it was -5, 2%. “Looking forward, given differences in labor market tightness, wage growth may continue to be stronger in the US than in the euro area,” he adds.