Euro area wage growth: eagerly waiting to see if the peak is reached
The ECB will not cut its policy rate until it is sufficiently certain that inflation returns to the medium-term target of two per cent on a sustainable basis. For this, a further cooling of services inflation is a very important condition, and its fulfilment will depend heavily on wage developments. The annual rate of increase in negotiated wages fell from 4.7 per cent in the third quarter of 2023 to 4.5 per cent in the fourth quarter. However, detailed information on recently negotiated wages suggests that it is too early to conclude at this stage that the peak of wage growth has been reached. The first-quarter 2024 negotiations remain eagerly awaited.
Wage cost growth key inflation determinant
Euro area inflation fell sharply in 2023. A further decline will be more difficult and uncertain than in 20231. However, a further cooling of core inflation - especially services inflation - would ensure it. Of these, wage growth is a key determinant. The production of services typically involves less capital and raw material costs than the production of goods. Wage cost increases also tend to be harder to absorb through productivity gains in service sectors than in manufacturing, although this is probably changing in a number of cases due to advancing digitalisation. Regardless, labour costs remain important for final prices and so the eyes of many inflation observers today are on wage developments. The European Central Bank (ECB) is also waiting for the outcome of wage negotiations in the next few months before cutting its policy rate. Indeed, moderate wage increases are essential to bring inflation sustainably close to the medium-term target of two per cent.
Limited figures
Figures on wage growth in the euro area are limited. The most complete and cross-country comparable ones are based on national accounts. These are the wage bill per employee or per hour worked, whether or not adjusted for labour productivity. However, these figures are published only on a quarterly basis and with long delays. Moreover, they sometimes do not give a sharp picture of wage pressures in the labour market. Indeed, they can also be affected by government measures, such as those taken to protect employment during the pandemic. The economic shocks from the lockdowns then also clouded the picture of productivity developments.
In the euro area, the outcome of collective wage bargaining in principle gives a sharper picture of wage dynamics in the labour market. Indeed, the wages of more than 75% of euro area workers are determined by collective bargaining agreements. In Belgium, France and Italy, this is even the case for all workers. But because of the great heterogeneity.2 regarding collective agreements, distilling a sharp picture of wage trends from these collective agreements takes a lot of work.
Since 2001, the ECB has published an indicator on the negotiated annual increase in the basic wage of an average euro area worker on a quarterly basis. It is based on wage information from nine euro area countries and is available somewhat faster than national accounts-based information. But it has the significant drawback that the underlying data are not fully harmonised, for instance on whether or not bonuses or overtime are included.
Nor does the indicator quickly give a sharp picture of any ongoing changes in wage pressures. However, especially after the recent upturn and cooling of inflation, changes in wage dynamics are crucial information today. After all, whether and to what extent wages are catching up with inflation is determined by the timing and circumstances of the formation of new collective agreements. But the published wage growth rate at any point in time is the result of both recently concluded, and long-standing collective agreements, and thus does not give a sharp picture of recent changes in collective bargaining outcomes.
However, based on a new database containing detailed information on the collective agreements in the five largest euro area countries (Germany, France, Italy, Spain and the Netherlands), Austria and Greece3, the ECB also has trackers4 of the current negotiated wage growth rates (with and without one-off surcharges), as well as future wage increases contained in current collective agreements. The ECB can also look separately at wage increases agreed in the most recent collective agreements.
Has wage growth peaked?
Figure 1, using the published ECB indicator, shows how the economic recovery after the pandemic, tight labour markets, and the inflationary surge in 2021-2022 caused negotiated wage growth to accelerate from 1.1% in the third quarter of 2021 to 4.7% in the third quarter of 2023. According to the figure just published for the fourth quarter, the wage growth rate would have slowed slightly to 4.5%. Does this also mean that a decline in the wage growth rate has begun?
The ECB tracker based on the detailed database points to slightly lower average negotiated wage increases in 2023 (3.7%, excluding one-off bonuses, and 4.2% including one-off bonuses). Based on all current collective agreements, the wage growth rate would increase slightly further to around 4.5% in 2024. This is the result of further acceleration in Germany and the Netherlands, largely offset by stabilisation or declines in other countries. In contrast, trackers based on the latest wage agreements suggest a cautious cooling in the pace of wage growth. Preliminary figures for the fourth-quarter agreements suggest a decline in wage growth to 3.6% over the next 12 months (5.2% including one-off surcharges). This was down from 5.0% (5.4%) in Q3 2023 agreements and 4.5% (5.5%) in Q2.
These figures may suggest some slowdown in the pace of wage growth. But there is no clear turnaround yet, especially as only a limited number of new collective agreements were concluded in the last three quarters of 2023. Particularly in Italy, many long-term collective agreements have not yet been renewed, meaning no inflation adjustment has yet been able to happen. More generally, numerous collective bargaining agreements are still on the agenda in the first quarter of 2024. The results of these therefore remain eagerly awaited before it becomes completely clear which direction wage trends will take.
1See: KBC Economic Research Report of 29 January 2024.
2The durations of collective agreements in the euro area range from one to four years with an average of about two years. There is often no fixed bargaining calendar and negotiations take place at numerous levels. The sectoral level is the most important in most countries, but negotiations also take place at company or regional level. In Belgium, negotiations take place at national, sectoral and company level.
3This covers information on about 90% of the euro area wage bill. Belgium, Finland and Portugal will be added to the database later.
4See: ECB Occasional Paper Series No 338 “A forward-looking tracker of negotiated wages in the euro area”.