Wages and labour costs developments in the EU and its Member States
Wage developments in the EU are responding to the economic and labour market developments discussed in Chapter 1. Tight labour market conditions and high inflation have pushed wages up, while the uncertainty about labour market prospects and an increasing labour supply (through higher labour market participation) have had the opposite effect. This has so far resulted in record-high wage growth in nominal terms in the last two decades, but this is still below inflation. Real wages decreased by 0.8 % in the second quarter of 2023 (compared with the same quarter of 2022). At the same time, 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.
The decline in real wages has been slowing down as a result of stronger wage growth and moderating inflation. Looking ahead, wage growth is likely to remain high in the coming quarters despite the economic slowdown, on the back of rising demands by workers aiming to recover losses in purchasing power (notably in services). According to the European Commission’s 2023 spring economic forecast, compensation per employee is expected to grow by 5.9 % over 2023. Nevertheless, real wages would still decrease in 2023 (by 0.8 %) and increase (moderately) only from the end of 2023. In 2024 real wages would still be well below 2019 levels. The outlook also remains very uncertain.
The ongoing real wage losses since the end of 2021 are weighing on households’ purchasing power and will continue to take a toll. The rate of financial distress among workers has risen significantly. The rate of material and social deprivation of workers has also increased sizably, while remaining below the levels reached following the 2007–2008 financial crisis, notably thanks to the resilience of labour markets and the efficient crisis response at EU and national level. At the same time, the effects on wage distribution vary between countries. In some Member States, minimum wage policies aimed at mitigating losses in purchasing power for low-wage earners may lead to a narrowing of the gap between the lower and the median wages, which in turn may lead to a decrease in in-work poverty.
Wage growth does not appear to be exacerbating inflationary pressures, as inflation expectations remain anchored. At the current juncture, the relatively moderate wage growth in some Member States (in light of the usual macroeconomic drivers of wage developments) suggests that there is some room to increase wages further in some sectors and Member States. Developments in profit margins also indicate that firms in some sectors have room to accommodate wage increases without raising prices significantly. At the same time, developments in labour costs and profits have been contributing to the persistence of the core inflation. Looking ahead, some second-round effects may occur, notably from higher-than-expected pay rises in services if profit margins are not adjusted, which calls for scrutiny.
Looking at wage developments from a long-term perspective, the process of wage convergence across EU countries (in purchasing power standard) has stalled since 2019 and large gaps persist. This suggests a prominent role for policies in facilitating upward wage convergence in the EU in the long run, by fostering productivity gains and ensuring that workers also benefit from these gains. At the same time, recent wage developments may contribute to an overall rebalancing of intra-EU competitiveness, except for some Member States.
A range of policies can help foster sustainable wage increases. Statutory minimum wage policy has played and will continue to play an important role in protecting the incomes of the most vulnerable workers. Strengthening collective bargaining and policies promoting upskilling and reskilling can improve the wage prospects of workers. In addition to policies targeting employees, enhancing firms’ productivity is key to supporting wage developments in the current context of low productivity growth, high uncertainty and high inflation. In this regard, rolling out the twin transitions successfully is a policy priority. Finally, ensuring sufficient competition and diversifying supply chains can also reduce price tensions and help enhance real wages.
Introduction
Wage developments in 2022–2023 have been influenced by a number of factors. Until the beginning of 2022, average wage developments still reflected the gradual recovery in working hours and the phase-out of support for short-time work linked to the COVID-19 pandemic. Over the course of 2022, inflation started to rise and labour markets remained tight. Yet wage developments were rather muted, due in particular to some headwinds (notably in manufacturing, associated with energy prices and supply chain constraints) and to institutional factors such as delays in wage negotiations and inflation having a lesser role in wage setting than in the past . Then, at the end of 2022 and beginning of 2023, mounting demands to protect purchasing power against rising inflation were counterbalanced by the continued high uncertainty associated with geopolitical tensions and high energy costs. As discussed in Chapter 1., economic growth started to decelerate in the third quarter of 2022 and, while an outright recession did not materialise, the growth outlook for 2023 remains weak and marked by high uncertainty.
Against this background, this chapter reviews wage developments and prospects in the current environment of high inflation. Section 2.2. provides an overview of the recent developments in nominal wages and looks at their possible future developments. Section 2.3. reviews developments in real wages and workers’ purchasing power against the background of persistent inflation and highlights the role of minimum wage policy in this regard. Section 2.4. examines the room for further wage increases in the current context by looking at factors behind the recent differentiation in wage developments across Member States and by assessing the potential effects of further wage increases on inflation and competitiveness. Section 2.5. then investigates the process of wage convergence over time. Finally, Section 2.6. reviews how policies could support sustainable wage increases.