Wages and labour costs developments in the EU and its Member States
Conclusions
Since the beginning of 2022, nominal wage growth in the EU has been robust, but still well below inflation, leading to significant losses in real terms.On the one hand, wage developments have been responding to tight labour market conditions and high inflation. These factors have driven up wages in 2022, while in 2021 the already high wage growth mainly reflected the rebound in hours worked after the pandemic. On the other hand, the increased uncertainty about labour market prospects, growing headwinds in some sectors (notably manufacturing) and the increased labour supply (through higher labour market participation) have contributed to mitigating wage increases. As a result, growth in nominal compensation per employee reached 6 % in the second quarter of 2023 (on an annual basis), a record high for most Member States, but real wages declined by 0.8 %. Since the second half of 2022, the increase in transfers to households and tax reductions have mitigated the drop in real gross disposable household income, leading to a slight rebound in real gross disposable income in the first quarter of 2023.
Real wages are set to continue to decline in 2023, but the decline in real wages has been slowing down as a result of stronger wage growth and moderating inflation.The overall robust wage growth expected in 2023 (5.9 %, despite the economic slowdown, on the back of persistent inflation, very tight labour market conditions and rising demands to recoup losses in purchasing power) may still represent a decrease in real wages of 0.8 %. While this decline would help rein in inflation, it would continue to weigh on purchasing power. Wages are set to moderately increase in real terms only from the end of 2023, leaving real wages at the end of 2024 still well below 2019 levels. The outlook is also uncertain. A possible more acute economic slowdown and the associated decline in labour demand would exert a stronger downward pressure on wages (possibly with greater differentiation in wage developments between sectors). By contrast, higher inflation would push nominal wages up, but weigh on real wages.
The ongoing real wage losses since the end of 2021 have been raising the social effects of the cost-of-living crisis, but the impact on wage inequality is ambiguous.The rate of financial distress among workers has risen significantly and the material and social deprivation rate for workers in the EU has increased sizeably as well. At the same time, the effects on wage distribution are also not straightforward. In some Member States, higher wage growth was witnessed in sectors with initially lower wage levels (notably in some service sectors). Statutory minimum wage updates were also significant, and between 2022 and July 2023 they also broadly compensated for the impact of high inflation on the purchasing power of minimum wage earners in half of the Member States where they are in place. This may lead to wage compression at the bottom of the wage distribution and, in turn, to a decrease in wage inequality and in-work poverty. However, in other Member States some sectors hit particularly hard by the crisis employ a larger share of low-wage earners. This may lead to an increase in wage inequality in those Member States.
While developments in profits and labour costs have been contributing to the persistence of core inflation, there is room for further wage increases in some sectors.Wage growth does not appear to be exacerbating inflationary pressures, as inflation expectations remain anchored. In many Member States, the persistent and high negative gaps in wage growth with regard to what can be explained by the usual macroeconomic drivers of wage developments also suggest some room for further wage increases, at least in some sectors and Member States. In this regard, developments in profit margins indicate that firms in some sectors have room to accommodate wage increases without raising prices significantly. This room would be larger in services, which could notably help accommodate further increases in statutory minimum wages, as minimum wage earners tend to be better represented in some services. At the same time, some second-round effects may occur, notably from higher-than-expected pay rises in services and profit margins, which calls for scrutiny.
The upward wage convergence in the EU has been stalling.Looking at wage developments from a longer-term perspective, the process of wage convergence across EU countries (in PPS) has stalled since 2019 for many Member States and large gaps persist between Member States, regions and categories of workers. The gaps are beyond what can be explained by productivity levels. This suggests that the upward convergence will take time and may require dedicated policies, to foster productivity gains and ensure that workers also benefit from these gains.
With regard to the protection of purchasing power, some policies directed at workers are key.Statutory minimum wage policies have played and will continue to play an important role in protecting the incomes of the most vulnerable workers. Strengthening collective bargaining is also key and fostering sectoral and cross-industry collective bargaining in particular can help factor relevant macroeconomic developments, such as productivity developments or risks of inflationary pressures, into wage negotiations. In this regard, the ongoing transposition of the EU Directive on adequate minimum wages can help promote sound governance procedures for setting and updating statutory minimum wages and strengthen collective bargaining. Furthermore, policies promoting upskilling and reskilling can improve the employment and wage prospects of workers, especially low-skilled workers.
In addition to policies targeted at workers, a range of other policies can help reach the untapped potential for wages.In the context of low productivity growth amid high uncertainty and inflation, enhancing firms’ productivity is key to supporting wage developments. In this regard, rolling out the twin transitions successfully is a policy priority. Finally, ensuring sufficient competition, particularly in services, and diversifying supply chains can also reduce price tensions and help enhance real wages.