Wages and labour costs developments in the EU and its Member States
Wage developments and outlook
This section looks at recent developments in average nominal and real wages, and how they could develop in the near future.
It highlights the recent peak and expected moderation in nominal wage growth (Section 2.2.1.) and discusses the rebound in real wage growth thanks to disinflation (Section 2.2.2.).
Nominal wage growth decelerates but is set to remain high
Nominal wage growth in the EU has been robust over the last 2 years but has started to moderate.
The growth in nominal compensation per employee reached a record high of 6.1 % in 2023, after 4.9 % in 2022 (Graph 2.1), due to the delayed effect of high and persistent inflation , as well as historically high labour market tightness . In the first quarter of 2024 it reached 5.6 % year-on-year before declining to 5.0 % in the second quarter of 2024, in a context of lower inflation and economic slowdown. Wage growth also moderated in the euro area, from around 5.5 % year-on-year in the first two quarters of 2023 to 4.3 % in the second quarter of 2024.
Graph 2.1: Nominal compensation per employee, annual percentage change
Note:
Nominal compensation per employee is calculated as the total compensation of employees divided by the total number of employees. EA-20 = the 20 countries in the euro area; Q2 = second quarter.
Source:
AMECO database and Eurostat, National accounts [namq_10_gdp, namq_10_a10_e].
The strong growth of negotiated wages has been a major driver of these wage dynamics, as calls to compensate for purchasing power losses accumulated since the end of 2021 have been gaining momentum .
Since the beginning of 2023, negotiated wage growth in the euro area has been significantly above the rates observed since the 2000s (Graph 2.2). They increased by a record high of 5.4 % (on an annual basis) in the third quarter of 2024. Over 2022 and 2023, nominal wages have grown faster than negotiated wages, partly due to sizeable increases in statutory minimum wages (see Section 2.3) , and as firms have provided sizeable bonuses, which allowed for non-permanent increases in compensation. Since mid-2023, negotiated wage growth has become closer to actual wage growth .
Graph 2.2: Growth of negotiated wages and of wages in job postings (%), euro area
Note:
The wages in job postings or the ‘“wage growth tracker’” is an indicator developed by the Central Bank of Ireland. It reflects the pay offered to a newly hired worker in six of the largest euro- area countries (Germany, Ireland, Spain, France, Italy, Spain, and the Netherlands and Ireland). The negotiated wages indicator also covers the wages offered to incumbent workers. Q1 = first quarter; Q2 = second quarter; Q3 = third quarter; Q4 = fourth quarter.
Source:
European Central Bank [STS.Q.U2.N.INWR.000000.3.ANR] and Central Bank of Ireland.
Wage growth still varies significantly between Member States.
The highest nominal wage growth in the second quarter of 2024 was observed to a large extent in central and eastern Member States, at more than 11 % in Bulgaria, Croatia, Latvia, Hungary, Poland and Romania, and between 6 % and 10 % in Estonia, Lithuania and Slovakia, in addition to Austria and Portugal. Many of these countries are characterised by high inflation, in particular Bulgaria, Romania, and Slovakia. By contrast, wage growth was below 3.2 % in Belgium, Ireland, France, Italy, Luxembourg and Finland, where inflation tended to be lower . Most Member States displayed an increase in wage growth in 2023 compared with 2022, partly thanks to the effects of wage negotiations following the peak in inflation , but wage growth tended to slow down afterwards in almost all Member States. Overall, while inflation was a major driver of the differences in wage growth across countries, labour market tightness played a less visible role but is likely to have contributed to differences in wage growth between sectors within Member States (see Box 2.1).
Nominal wage growth is set to ease further but remain robust overall.
According to the European Commission’s European Economic Forecast Autumn 2024, nominal compensation per employee is expected to grow by 4.8 % in 2024 and 3.5 % in 2025. This is well above the 2013-2019 average of around 1.8 % but lower than the 2023 levels (6.1 %), due to the deceleration in inflation and a weak economic context. At the same time, wage growth is still set to be marked by large variations across Member States . The growth rate of wages in job postings (i.e. for newly hired workers) in the euro area also points towards future wage moderation, as it decreased significantly in 2024, and stands below the growth rate of negotiated wages .
Box 2.1: Labour shortages and wages
Labour market tightness is expected to exert upward pressure on remuneration.Labour shortages imply that the supply of workers who are appropriately skilled and willing to work for a given wage rate and under specific working conditions does not meet the demand. In turn, firms facing higher labour shortages pay a wage premium to keep incumbent employees and attract new ones (Brunow et al., 2022; Blanchfower et al., 2008). Recent Commission estimates also show that in the EU an increase of 1 pp in reported labour shortages has triggered a 0.11 pp increase in the yearly wage growth on average over the last two decades .
The positive effect of labour shortages on wages is most evident at the sectoral level.Most evidence shows that sectoral differences in labour shortages have an impact on relative sectoral real wage growth. In particular, sectors with above-average labour demand tend to offer higher wages to attract workers from other sectors (Brunow et al., 2022; Frohm, 2021; Groiss et al., 2023). The European Commission estimates also indicate that the primary effect of sectoral labour shortages is a redistribution of real wage growth towards sectors with greater labour shortages. By contrast, changes in labour shortages within sectors have more limited effects on average real wage growth.
Over time, labour shortages can have some conflicting effects on wages.On the one hand, lasting labour shortages may create incentives for firms to invest in technology and substitute labour with more capital- or technology-intensive production techniques. This can improve labour productivity and in turn allow for higher real wages (Acemoglu et al., 2017; Acemoglu et al., 2019; Zeira, 1998). On the other hand, skills shortages can also adversely affect production and hinder innovation, thereby constraining wage developments over time (Horbach et al., 2020; Coad et al., 2015).
In the years preceding the COVID-19 pandemic, aggregate wage growth remained sluggish in many advanced economies, despite the rise of reported labour shortages and low unemployment (Frohm, 2021).Several explanations for this have been put forward, including globalization (Borio et al., 2018), automation (Leduc et al., 2020), lower matching efficiency in the labour market (Jonsson et al., 2019), weaker bargaining power of labour (Krueger, 2018), and real wage growth being hindered by persisting misperceptions among employees about the opportunities and benefits of changing jobs hindering (Jäger et al., 2023). Labour shortages declined during the COVID-19 pandemic, but reached record high levels afterwards. Nonetheless, real wages experienced deep losses over 2021-2023.
Since the COVID-19 pandemic, the effect of labour shortages on real wage growth has weakened further.Commission estimates show that while before 2020 there was a clear link between sectoral and country-specific labour shortages and real wage growth, such a link becomes statistically insignificant after 2020. On top of on-going structural trends, specific factors may have an effect, notably the following:
- The energy crisis has disproportionally affected wages in many central or eastern European Member States, due to a higher share of energy-intensive sectors, even where labour markets were tight (e.g. in Bulgaria, Croatia, Hungary, Poland and Slovakia). This has weakened the link between labour shortages and wages among countries, but this link remains evident at sectoral level. The higher wage growth witnessed in low-paid sectors may reflect the very high labour shortages witnessed after the pandemic (ECB, 2022) , but also strong minimum wage increases (see also Section 2.3.2).
- Furthermore, since 2022, employers and employees may have taken into account the high economic uncertainty and slow wage growth in their wage decisions (Borland, 2023).
- In addition, in some sectors higher wage growth may have lowered demand for some non-essential products, particularly during the cost-of-living crisis.
Further research is needed to assess to what extent the decoupling between real wage growth and labour shortages is temporary or more structural.
- Related note aA set of panel regressions is used to explore the relationship between labour shortages and real wage growth. First, the annual real wage growth by sector is regressed on reported labour shortages, with a country- and sector-specific fixed effect (that captures differences stemming from countries or sectors) and a time fixed effect (that component of wage growth that is common to all countries and sectors, notably related to the underlying inflation). Second, to identify changes after the pandemic the same regression is estimated including a break in the response of wage growth to labour shortages after 2020.
- Related note bThe structure of R-squared indicates that a large share of the variability comes from between and not within country-sectors. This implies that cross-sectoral and cross-country variability in labour shortages has a greater impact on sectoral and country-specific real wage growth than the developments over time of labour shortages within a specific sector do (periods of more pronounced labour shortages and vice versa do not have a pronounced effect on real wages).
- Related note cIn particular in contact-intensive services, after the end of lockdown measures and voluntary social distancing.
A mild rebound in real wage growth
After a substantial decline in 2022, real wages in the EU started to edge upwards in the second half of 2023.
They declined substantially in 2022, by 3.9 %, and continued their drop in the first half of 2023 (leading to a further decline by 0.4 % in 2023). However, real wage growth turned positive in the second half of 2023 and reached 2.4 % in the second quarter of 2024, compared with the same quarter of the previous year (Graph 2.3). Real wages recovered due to falling inflation, and despite stagnating nominal wage growth, higher labour market participation and increased uncertainty about labour market prospects.
Graph 2.3: Real wages per employee, annual percentage change
Note:
Real wages were computed using the harmonised index of consumer prices as a deflator. EA-20 = the 20 countries in the euro area; Q2 = second quarter.
Sources:
AMECO [5 0 0 0 HWWDW, 5 0 0 0 ZCPIH] and Eurostat [namq_10_gdp, namq_10_a10_e, prc_hicp_midx].
Nominal wage growth has started to exceed inflation in almost all Member States.
Relatively strong real wage growth (on an annual basis) was observed in the second quarter of 2024 in many central and eastern European Member States (except in Slovenia and to a lower extent in Czechia), in line with their catching-up process in GDP per capita and a rebound in real wages after deep losses in 2022. Real wages also increased by 3 to 5 percentage points (pps) in Denmark, Austria and Portugal. By contrast, real wages did not show a clear rebound in southern European Member States (except Portugal), Ireland and Sweden, and were almost stable in France and Finland. In Belgium and Luxembourg, real wages decreased (by -2.1 pps and -1.4 pps, respectively), after a strong rebound in 2023.
Real wages in the EU are expected to continue growing throughout 2024.
After decreasing by 0.2 % in 2023 as a whole, real wages in the EU are set to rise by 2.3 % in 2024 and recover some of their lost ground, according to the European Economic Forecast Autumn 2024. This is notably due to the expected further decline in inflation and the moderating but still robust nominal wage growth. Real wage growth is expected to increase and be positive in almost all Member States throughout 2024, except in Belgium (-1.5 %) and Cyprus (-0.7 %) and Finland (-0.7 %). It is set to reach more than 5 % in Bulgaria, Croatia, Latvia, Lithuania, Hungary, Poland, and Romania.
However, despite the expected increases in 2024, real wages could still be 1.1 % below their pre-pandemic levels, with wide differences across Member States (Graph 2.4) .
The gap compared with their 2019 levels is expected to remain particularly large in Italy, Greece (which display low nominal wage growth) as well as Czechia (which faces very high inflation), Germany, France and Finland. Nonetheless, real wages in many Member States in southern and central and eastern Europe are converging towards the EU average. Notably, the gap in compensation per employee in purchasing power standards relative to the EU average is projected to be lower in 2024 than in 2019 in all central and eastern European Member States. By contrast, in southern European Member States, this gap is set to decrease sizeably only in Portugal, while it is expected to grow in Greece, Cyprus and Malta (see Graph A.2 in the annex).
Graph 2.4: Real wage changes (%) compared with pre-pandemic levels (2019)
Note:
Note: Real wages were computed using the harmonised index of consumer prices as a deflator. EA-20 = the 20 countries in the euro area.
* For Bulgaria, real wages increased by 33,9% between 2019 and 2024 (out of the scale of the graph).
Source:
AMECO [5 0 0 0 HWWDW, 5 0 0 0 ZCPIH].