Recent developments and prospects for real wages and purchasing power

This section highlights the ongoing decline in real wages despite the high nominal wage growth and some of the social effects (Section 2.3.1.); then it discusses the prospects for real wage growth in 2023 (Section 2.3.2.). It also underlines the role played by minimum wages in mitigating purchasing power losses for low-wage earners (Section 2.3.3.). Finally, it underlines some possible effects of the cost-of-living crisis on wage distribution (Section 2.3.4.).

Developments in real wages and purchasing power

In most Member States, nominal wage growth has remained below inflation .Real wages declined by 0.8 % in the second quarter of 2023 compared with the same quarter of 2022 in the EU. Real wage losses are still observed in a majority of Member States, with the largest drops (more than 4 %) in Czechia, Italy and Malta (Graph 2.4). By contrast, some Member States already experienced a marked rebound in real wages, with an annual growth of more than 5 % in the second quarter in Belgium, Romania and Slovenia.

Graph 2.4: Real wages per employee, annual percentage change

Additional information about graph 2.4

The figure shows the annual changes in real wages per employee across the EU Member States for three specific time periods: the full years of 2021 and 2022, as well as the second quarter of 2023. In 2021, the majority of EU Member States saw a rise in real wages, with an overall EU growth rate of 1.1 %. However, 2022 marked a downturn, as most countries reported negative growth, contributing to an overall EU decline of 3.7 % in real wages. As for the second quarter of 2023, the data shows mixed results; approximately half of the EU Member States experienced positive wage growth compared to the same quarter in 2022. In the EU overall, real wages decreased by 0.8 %. The individual growth rates for this quarter varied widely among Member States, with Romania leading at 8.7 % and Czechia at the opposite end, showing a decrease of 4.7 %.

Note

EA-20, the 20 countries that have adopted the euro. Real wages were computed using the harmonised index of consumer prices as a deflator.

Source

Ameco [5 0 0 0 HWWDW, 5 0 0 0 ZCPIH] and Eurostat [namq_10_gdp, namq_10_a10_e, prc_hicp_midx].

The decline in real wages continues, but at a slower rate, as a result of a strong wage growth and moderating inflation.The decline observed in the second quarter of 2023 (-0.8 % compared to the same quarter of 2022) was significantly lower than in the first quarter of 2023 (-3.4 %) and far below the record fall of 5.1 % year-on-year in the EU in the third quarter of 2022. This slowdown in real wage losses is the result of increased annual nominal wage growth , combined with a downward trend in inflation since November 2022. It has been observed in most Member States since the fourth quarter of 2022, but not or to a lower extent in countries such as France, Hungary, Italy, Malta or Poland (Graph 2.A1.2 in Appendix 1).

Purchasing power losses of households have been mitigated by public transfers and tax reductions, leading to a slight rebound in real gross disposable income in the first quarter of 2023.Developments in compensation started to negatively affect the real gross disposable household income in the third quarter of 2022 (Graph 2.5). The developments contributed to reducing the real gross disposable household income by 1.6 % in the third quarter of 2022 and by 2.2 % in the fourth quarter of 2022 (compared with the same quarter of 2021). At the same time, tax and benefit policies have mitigated those losses. As a result, the real gross disposable household income declined by only 0.4 % in the fourth quarter of 2022 (compared with a year before). In the first quarter of 2023, real wage losses still negatively affected the real gross disposable household income, but to a lesser extent than in the second half of 2022. Thus, net transfers contributed to a slight rebound in the real gross disposable household income (on a yearly basis). Some of the measures, such as direct transfers or tax reductions, supported incomes directly, while others, e.g. those affecting consumer prices of energy, supported purchasing power indirectly. So far, the majority of support measures undertaken by EU countries have consisted of untargeted price policies, regulating energy prices (e.g. through price caps) or reducing energy-related taxes for households . Such exceptional support measures for households are gradually withdrawn, notably in light of energy prices falling from their peak levels.

Graph 2.5: Real gross disposable household income growth and its main components, EU

Additional information about graph 2.5

The figure shows the real gross disposable household income growth and its main component from the third quarter of 2021 to the first quarter of 2023. Changes to the previous year in the net transfers, net property income, compensation of employees and self-employed people and real GDHI are displayed. The net transfers showed decreases from the third quarter of 2021 to the second quarter of 22, they increased from the third quarter of 2022 onwards. Similarly, the compensation of employees showed a positive development until the second quarter of 2022, while it decreased from the third quarter of 2022 onwards. The net property income developed positively from the fourth quarter in 2021 onwards, showing a particularly high increase of 1.5 % in the second quarter of 2022. These developments contributed to reduce the real gross disposable household income, which showed a decrease from the second to the fourth quarter of 2022. It reached a negative change of –0.6 % in the fourth quarter of 2022. In the first quarter of 2023 it increased again.

Note

GDHI, gross disposable household income. The nominal GDHI is converted into real GDHI by deflating values using the deflator (price index) of household final consumption expenditure. Net transfers notably include net social benefits and taxes on income and wealth (negative contributions).

Source

Commission calculations based on Eurostat, National Accounts [nasq_10_nf_tr and namq_10_gdp].

Real wage growth prospects

Real wage growth is expected to still decrease in 2023, and real wages to rebound moderately in 2024, but remaining still well below 2019 levels.According to the European Commission’s 2023 spring forecast, real wages are still set to decrease in 2023 (by 0.8 %), though a slight pick-up is expected towards the end of 2023. In 2024, real wages are set to recover some of the lost ground (+ 1.5 %), due to the expected decline in inflation. However, the real wage increase forecast for 2024 would leave real wages almost 2.8 % below the 2019 level.

These developments are bound to continue to affect households’ purchasing power.The ongoing decreases in real wages is likely to weigh on workers’ purchasing power in 2023. In addition, the drivers of inflation have become more broad-based, going beyond energy and food and including for instance services and some imported goods, making it more difficult to target support policies at those most in need.

Significant differences in real wage developments between Member States are expected.In 11 Member States, real wages are projected to remain below pre-pandemic levels at the end of 2024 (in particular by more than 4 percentage points in Czechia, Greece, Spain and Italy; by almost 3 percentage points in Germany and the Netherlands; and by less than 1.5 percentage points in France, Cyprus, Malta, Finland and Sweden – see Graph 2.A1.3 in Appendix 1). By contrast, real wages are expected to be above pre-pandemic levels by the end of 2023 in Belgium and Luxembourg (in part due to indexation mechanisms); in Estonia, Ireland, Poland and Portugal (by less than 5 %); and in Bulgaria, Croatia, Latvia, Lithuania, Hungary and Slovenia (by more than 5 %) .

The role of minimum wage policy in mitigating purchasing power losses

Between January 2022 and July 2023, statutory minimum wages increased significantly.They grew by more than 5 % in nominal terms in all Member States where such wages are in place and by more than 10 % in most of these countries (Graph 2.6). Such increases in statutory minimum wages were the result of both the January 2023 updates and substantial increases throughout 2022, in a context where low wage earners have been particularly affected by the high cost of living. The increases in 2022 reflected both automatic indexation adjustments where such mechanisms are in place (e.g. Belgium, France and Luxembourg) and discretionary updates (e.g. Germany, Greece and the Netherlands) . In turn, some updates occurred in a few Member States after January 2023 (sizeable ones in Greece and Luxembourg, as well as more moderate ones in Poland, the Netherlands, France, and Germany).

These updates have compensated for the impact of high inflation on the purchasing power of minimum wage earners in half of the Member States with statutory minimum wages.Between January 2022 and July 2023, statutory minimum wages increased in real terms by about 2% or more in Germany, Belgium, Greece, Luxembourg, the Netherlands and Bulgaria (Graph 2.6) . In Poland, Romania, Latvia, Spain and France, they remained broadly unchanged (in real terms). However, they declined by more than 3% in real terms in ten of the Member States with statutory minimum wages, including by more than 10% in Czechia and Hungary, and by around 10% in Estonia, Malta and Slovenia. More specifically, in Czechia, Estonia, Hungary, Lithuania and Slovakia, the decline is explained by the fact that annual updates did not fully compensate for inflation, hence statutory minimum wages in real terms in January 2023 were sizeably below their January 2022 levels. In Croatia, Ireland, Malta, Portugal and Slovenia, no additional discretionary updates have taken place since January 2023, and as a consequence, the persistently high inflation has continued to erode minimum wages in real terms.

By contrast, in Member States without a statutory minimum wage, collectively agreed minimum wages registered subdued growth, leading to substantial losses in real terms.In Denmark, Italy, Austria, Finland and Sweden, which rely on collective bargaining for minimum wage protection, nominal increases in negotiated wages for the lowest paid occupations fell largely short of inflation between January 2022 and January 2023 . This led to substantial wage losses in real terms for those workers (above 7 % in Italy; between 6 % and 5 % in Denmark, Finland and Sweden; and above 4 % in Austria).

A few Member States have recently introduced reforms to their minimum wage setting systems. Cyprus introduced a statutory minimum wage as of January 2023. At the end of 2022, Romania adopted a law on social dialogue, aimed at enhancing collective bargaining and the coverage of collective agreements by giving trade unions greater powers and establishing an easier procedure for representing employees. Bulgaria amended its Labour Code to introduce a new mechanism for setting the statutory minimum wage level at 50 % of the average gross wage, which is one of the reference values contained in the Directive on adequate minimum wages in the EU . Indicative reference values are also being mentioned in discussions about possible reforms in, for example, Belgium, Ireland, Spain and Slovakia..

Graph 2.6: Minimum wage developments in Member States with statutory minimum wages, percentage change

Additional information about graph 2.6

The figure shows the growth rates of minimum wages in both nominal and real terms, in EU Member States that have a statutory minimum wage. Two time periods are covered: January 2022 to July 2023 for both nominal and real growth; and January 2022 to January 2023 for real growth. In nominal terms, minimum wages increased in all Member States over the period examined. However, in real terms, almost half of these countries saw a decrease in minimum wages between January 2022 and January 2023, and more than half of them between January 2022 and July 2023. There is considerable variation among Member States; for example, Germany saw a 9.2% increase in minimum wage between January 2022 and July 2023, while Czechia experienced a 12% decline over the same period.

Note

Cyprus was excluded as the statutory minimum wage was introduced in 2023.

Source

Eurofound and Eurostat [earn_mw_cur, prc_hicp_midx].

Social impacts and expected developments in the wage distribution

Despite the minimum wage increases and support measures, the rise in the cost of living since 2021 has significantly increased the rate of financial distress among workers.With the surge in inflation, more workers have been relying on savings or running into debt to cover current expenditure needs. Based on the European Business and Consumer Surveys, the proportion of workers reporting financial distress stood at 15.2 % for the EU in May 2023 (latest available data), 5 percentage points higher than in January 2022 and 3.4 percentage points higher than in the pre-pandemic period (11.8 %). Between January 2022 and March 2023, reported financial distress increased for all Member States except Bulgaria and Poland, where slight decreases were recorded (data were not available for Croatia, Cyprus or Romania); the largest increases were recorded in Estonia, Greece and Hungary (by more than 9 percentage points) and in Italy, Portugal and Denmark (between 7 and 9 percentage points).

Social and material deprivation has increased for workers, while remaining below the levels reached following the 2007–2008 financial crisis.The rate of material and social deprivation for employed people in the EU increased from 7.3 % in 2021 to 8.3 % in 2022. In particular, the prices for food and energy (covering electricity, gas and fuel), two key items in the consumption basket of low-income households, were 14.7 % and 9.4 % higher, respectively, in April 2023 than the year before, well above the average pay rise over the same period . At the same time, the social and material deprivation of workers remained well below the levels reached following the 2007–2008 financial crisis (13.3 % for the EU in 2014), notably thanks to the resilience of the labour market and policies undertaken to support low-wage earners (minimum wage policy and net transfers). Estimates suggest that, in the absence of mitigating factors such as wage developments and support mechanisms (and more broadly tax-benefits systems), inflation would have led to an increase of 1.9 percentage points in material and social deprivation in the EU .

At the same time, developments in statutory minimum wages vis-à-vis average wages suggest a wage compression at the bottom of the wage distribution, possibly reducing wage inequality.In many Member States with statutory minimum wages, minimum wage growth between January 2022 and January 2023 stood above the growth of average hourly wages. This is particularly the case in Belgium, Germany, Spain, Latvia, the Netherlands and Slovenia . As a result of spill-over effects on wages close to the minimum wage, a wage compression at the bottom of the wage distribution (i.e., a narrowing relative gap between the lower tranches of wages and the median wage) is expected in these countries .

Developments in sectoral wages also indicate some reduction in the pay gap between sectors with a higher share of low-paid workers and the others.On average, sectors such as industry, the financial sector or scientific and technical activities tend to pay higher wages than many other services (notably trade, transport and accommodation) and construction. Since mid-2022, the higher wage growth in the latter has contributed to narrowing the pay gap between those sectors and sectors with a higher pay (Graph 2.7). This may reflect both the effect of statutory minimum wage increases in some sectors (as low-wage earners tend to be better represented in trade, transport and accommodation) and the differentiated effects of the economic slowdown between sectors (industry being more affected, while wages accelerated more in some lower-paid services) .

At the same time, the effects of the current crisis on in-work poverty are likely to vary between Member States.Changes in in-work poverty depend on the developments of lower wages compared with median wages. A wage compression at the bottom of the wage distribution is likely to reduce in-work poverty in some Member States (even if it implies losses in standards of living). However, in-work poverty also depends on the sectoral shares of low-wage earners and how the crisis affects sectoral wages, which is country-specific. For instance, a marked slowdown in manufacturing may worsen in-work poverty in Bulgaria, Estonia, Croatia, Latvia and Luxembourg, where manufacturing employs a significant share of low-wage earners.

Graph 2.7: Average year-on-year quarterly growth rate of compensation per hour worked between 2016–2021 and in 2022 (%)

Additional information about graph 2.7

The graph shows the average year-on-year growth rate of compensation per hour worked across different sectors, and for three different periods: between 2016-2021, in the first two quarters of 2022, and in the second two quarters of 2022. The average annual growth rate the first period was around 2.5% for the economy as a whole, ranging from 1.7% in the financial services sector, 2.1% in industry and 3.9% in the real estate sector. In the first half of 2022, the year-on-year quarterly growth rate is higher in most sectors: 3.4% for the economy as a whole; above 5% in industry and information; at 4.7% in construction. The exceptions are trade, transport and communications, where the growth rate at 2.1% was the same as in the period 20216-2021; arts, where growth was lower than in the period 2016-2021; and real estate where growth in the fisrt half of 2022 was close to zero. Finally, in the last two quarters of 2022 all sectors show strong growth rates, systematically above the long-term average of 2026-2021, and also higher than in the first half of 2022 in all sectors exept information and construction.

Note

Sectors are ranked based on average full-time adjusted salary per employee in 2016 calculated by multiplying wages per employee by the ratio of average number of usual weekly hours of worked for full-time versus total employment weighted by employment in sectors to correspond to sector groups of compensation per hour worked.

Source

Eurostat [nama_10_a10, nama_10_a10_e, lfsa_ewhun2]

Notes

  1. In this chapter, real wages are measured as wages and remuneration, deflated by the harmonised index of consumer prices.
  2. From 4.5 % in the third quarter of 2022 to 6.0 % in the second quarter of 2023 (on an annual basis) – see previous section.
  3. See European Commission (2022b) for a review of national measures taken in response to high inflation and the energy crisis.
  4. For all of these Member States except Belgium, real wages are already higher at the end of 2022 than before the pandemic.
  5. Minimum wages are often updated annually, at the beginning of the year. In January 2023, the largest increases were registered in Latvia, with an increase of 24 %, and Estonia, Croatia, Lithuania, Hungary, the Netherlands, Poland, Romania and Slovenia, all with increases of between 10 % and 20 %.
  6. For more details, see European Commission, Directorate-General for Employment, Social Affairs and Inclusion (2022), For more details, see European Commission, Directorate-General for Employment, Social Affairs and Inclusion (2022), Publications Office of the European Union, Luxembourg.
  7. At the same time, limited increases in minimum wages in real terms may not necessarily translate into a (persistent) higher standard of living for those workers. In particular, in Member States with high inflation, these gains may be quickly eroded throughout the year in the absence of further upgrades. In addition, minimum wage earners tend to spend a larger share of their income on the goods most affected by inflation (i.e. food and energy), implying that these workers face higher price increases.
  8. Eurofound (2023), Minimum Wages in 2023 – Annual review, Minimum wages in the EU series, Publications Office of the European Union, Luxembourg. Eurofound uses the minimum wage rates for 10 low-paid jobs as a proxy indicator of minimum wage levels.
  9. Directive 2022/2041 of the European Parliament and of the Council of 19 October 2022 on adequate minimum wages in the European Union (OJ L 275, 25.10.2022, p. 33).
  10. Reported financial distress is defined as the need to draw on savings or to run into debt to cover current expenditures. For details on the Business and Consumer Surveys, including the Consumer Survey’s question on the current financial situation of households, see European Commission (n.d.), ‘Business and consumer surveys’ (http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.html).
  11. In addition to food and energy, the share of employed people who cannot afford to spend a small amount of money each week on themselves had already increased markedly before the inflation peak, with large increases up to the third quintile in some Member States, which indicates a worsening situation for the middle class as well.
  12. See: Caisl et al. (2023). For other estimates on the effects of the higher cost of living on the whole population, also see: Fulvimari et al. (2023).
  13. In those Member States, the statutory minimum wages increased in real terms between January 2022 and January 2023, contrasting with marked decreases in the average real wages over the same period, suggesting a wage compression.
  14. Analysis conducted by the European Commission shows that, across all Member States between 2006 and 2014, minimum wage increases significantly affected the wages at the bottom of the wage distribution. See European Commission (2018), pp. 134–135. Evidence (in a lower inflation environment) shows that, in some Member States, spillovers could even extend to higher wage tranches (e.g. up to the third decile of the wage distribution in Ireland and up to the seventh decile in France). See Redmond (2020), and Aeberhardt et al. (2012).
  15. This is consistent with OECD (2023), which shows, for the OECD, that between the third quarter of 2019 and the third quarter of 2022 real wages declined only slightly in the three industries at the bottom of the pay rank (accommodation and food services, administrative and support services and arts and entertainment), but by at least 1 % in most other industries.