Wages and labour costs developments in the EU and its Member States
Conclusions
Real wages in the EU have broadly recovered their pre-pandemic levels, but their growth is constrained by structurally weak productivity developments. The rebound in real wages in the EU is due to a still robust nominal wage growth amid a rapid disinflation. However, the situation varies across Member States and groups of workers. Looking forward, real wage growth is expected to decline, reflecting weak productivity growth, increased uncertainty, as well as easing labour markets.
The risk that wage growth would trigger sizeable inflationary effects is low. At EU level, profits are still cushioning the impact of sustained wage growth on inflation, while long-term inflation expectations remain broadly unchanged at around 2%. This points to a low risk of large inflationary pressures for the EU overall, although inflation is somewhat more persistent in some countries like Austria, Belgium, the Netherlands and Portugal, and notably in services.
There have been positive developments for low-wage earners over the last years, but wage adequacy remains a concern in some countries and for some groups of workers. While the situation of low wage earners requires continued policy attention, their relative situation has improved since the pandemic, as reflected in declines in in-work poverty and the share of low-wage earners. At the same time, lower-middle- and middle-wage earners have become on average more vulnerable, with many reporting increased difficulty in affording basic goods or services between 2019-2023. This reflects the drop in real wages during the high inflation period, but also that these wage earners typically have not benefitted from support measures and minimum wage increases. Their situation has particularly worsened in some Member States with higher GDP per capita where the rebound in real wages in 2024 has been weak, such as Germany, Finland and Sweden. This may have fed the perceptions of unfair income distribution and rising discontent among middle classes. In this context, policies need to account for the lingering effects of the pandemic and energy crises that many of the workers of or close to the middle class still experience.
Policies need to focus on reinforcing productivity and adequate wages at the same time, with non-cost competitiveness playing a crucial role in this dynamic. Weak productivity growth continues to weigh on cost competitiveness and the potential for wage increases in many Member States. Several structural factors contribute to this weakness in productivity growth, such as the decline in manufacturing, as well as innovation and R&D spending gaps vis-à-vis the US. Focusing on non-cost competitiveness, such as the quality of products, rather than relying excessively on cost aspects and low wages can help to ensure that wage growth goes hand in hand with productivity growth in the future. At the same time, productivity gains are sometimes accompanied by increasing wage disparities, for instance due to wage polarisation. Thus, focusing solely on productivity may not be enough to improve wages for all.
Enhancing competitiveness and wage adequacy simultaneously requires a comprehensive policy mix, tailored to country-specific needs. Weaknesses in investment, innovation activity, digitalisation, and business dynamism call for policy attention, as highlighted in the Competitiveness Compass and the Draghi report and outlined in the Clean Industrial Deal. Beyond, structural policies are needed to enhance skills and facilitate labour market reallocation, but also measures that directly affect wage-setting – especially by implementing an adequate minimum wage protection and well- functioning collective bargaining so that workers reap the benefits of the gains in productivity. This should go hand in hand with improving overall job quality.