Wages and labour costs developments in the EU and its Member States
The interplay between wages and competitiveness
Productivity growth is key for promoting adequate wages. Productivity growth supports economic growth, competitiveness, job creation and sound public finances, which are all essential for maintaining our social welfare model. In turn, it contributes to the economic fundamentals needed for sustainable wage growth. However, productivity gains can in some cases also be accompanied by downward pressure on wages and wage disparities. Against this backdrop, this section examines under which circumstances productivity and adequate wage growth go hand in hand, and how non-cost competitiveness, such as the business environment and the quality of products, can help in this respect.
Weak productivity in the way of higher wage growth in the EU
Productivity gains tend to give companies room to reward their workers for the higher output, and therefore typically goes hand in hand with higher wages. This is also reflected in the strong, positive correlation between productivity gains and real wage growth (Graph 2.10). However, heterogeneity across countries also highlights the important role of other factors, including policies (Section 2.5). If real wage growth is below productivity growth, the labour share declines, reflecting a distribution of productivity gains increasingly oriented towards capital rather than labour (see also Annex 2.1) .
Weak productivity growth has weighed on sustainable wage increases in the EU over the past decade. For the EU, average annual labour productivity growth was 0.7% between 2010 and 2022, well above real compensation growth, at 0.1% (Graph 2.10). The stronger increase in productivity than wages has resulted in a decline in the labour share in 2022 . In turn, with the recovery in real wages over 2023-25, annualised real compensation growth increased to 2% and exceeded labour productivity growth, at 0.4%, leading to a recovery in the labour share. Productivity growth in the EU was lower than in the US in both periods (see also Section 2.4.2).
Graph 2.10: Productivity and real compensation per employee, annualised growth rates
Note:
Real compensation is deflated using the HICP index.
Source:
Ameco [UWCD.1.0.0.0; NWTD.1.0.0.0; NETD.1.0.0.0; OVGD.1.0.0.0; ZCPIH.1.0.0.0].
Several structural factors have contributed to this weakness in productivity growth in the EU . This includes the declining share of employees in low- to medium-wage jobs in low-productivity sectors (Chapter 1). Moreover, the EU suffers from innovation and R&D spending gaps vis-à-vis the US, and relatively small sectors where productivity growth is relatively strong, notably ICT, industries and digital services. This weighs on total factor productivity and the creation of high-quality jobs. Also firms tend to be smaller in the EU than the US which reduces their potential to harness productivity gains through economies of scale.
However, higher wages can also boost productivity, fuelling a virtuous circle between wage and productivity growth. For instance, increases in minimum wages were in some cases found to boost the labour productivity of low wage earners . In particular, the existence of wage premiums can motivate employees to upskill and use their work time more efficiently, which contributes to raising productivity. Also, higher wages can push for more rationalisation of production and innovation by firms in order to preserve competitiveness. Finally, wage pressures can also incentivise firms to improve their competitiveness by means of non-price aspects, such as the quality of their products, rather than cutting costs . A positive impact of higher wages on productivity also depends on various other factors, including a country’s economic characteristics and policies . Policies that boost wages and productivity at the same time therefore support competitiveness and wage adequacy (Section 2.5).
Both non-cost and cost competitiveness matter for sustainable and adequate wage increases
The interplay between wage and productivity growth has direct implications for cost competitiveness. Improvements in wages need to go hand in hand with economic sustainability and competitiveness to ensure sustainable economic activity and job creation. Nominal wage increases beyond what productivity gains suggest risk undermining investment and a country’s cost competitiveness. Over recent years, a number of Member States have witnessed substantial increases in unit labour costs (ULCs). ULCs, the ratio of nominal compensation to productivity is commonly used as a measure of cost competitiveness. Many catching-up countries have witnessed strong increases in ULCs between 2010 and 2022, and also more recently, between 2023 and 2025, including Bulgaria, Estonia, Hungary, Latvia, Lithuania and Romania (Graph 2.11). This has raised competitiveness concerns in several of these countries and may weigh on wage growth in the future . However, if firms excessively rely on cost competitiveness and low wages, there is a risk that productivity gains are accompanied by a race to the bottom in terms of labour costs and downward pressure on wages, which ultimately leads to a decline in the labour share.
Graph 2.11: Unit labour costs (ULCs), nominal compensation per employee and labour productivity
Note:
Unit labour costs are defined as compensation per employee over gross value added divided by total employment. Therefore, productivity is shown with a negative sign in this graph, reflecting its mitigating effect on unit labour costs.
Source:
Ameco [UWCD.1.0.0.0; NWTD.1.0.0.0; NETD.1.0.0.0; OVGD.1.0.0.0].
Non-cost competitiveness can play an important role in supporting productivity and higher wages. If non-cost aspects of competitiveness such as the business environment or the quality of exported goods increase, demand is less likely to decline in response to higher prices and labour costs. In fact, many Member States have witnessed substantial increases in export market shares, despite a notable rise in unit labour costs and real effective exchange rates. In the EU, export market shares of services and goods increased by 8% between 2012 and 2023, while ULCs unit labour costs in the tradeable sector rose by 15% (Graph 2.12) . The gains in non-cost competitiveness allowed to offset losses in cost competitiveness in Bulgaria, Lithuania, Poland, and Romania. In some other countries for which cost competitiveness concerns have been voiced in recent years, non-cost competitiveness led to more limited gains in export market shares, including in Czechia, Estonia, and Latvia. The potential role of non-cost competitiveness in promoting higher wages is also reflected in its high correlation with real wage growth (Graph 2.13, panel a).
Graph 2.12: Non-cost competitiveness, 2012-2023
Note:
Estimates of cost competitiveness are based on changes in REERs and an assumed price elasticity of exports equal to -1.25 (see also Correa-Lopez, et al., 2012 and Annex 2.1). Non-cost competitiveness is then approximated as residual by subtracting the estimated changes in cost competitiveness from changes in export market shares. Export market shares refer to goods and services.
Source:
Eurostat [tipsex11; tipser13].
However, although productivity and non-cost competitiveness gains promote higher wages, they can, in some cases, be accompanied by a less even wage distribution . The link between changes in non-cost competitiveness and the wage distribution is quite heterogeneous across countries, also among Member States with similar levels of GDP per capita (Graph 2.13, panel b) . For instance, non-cost competitiveness improved and wage disparities declined in Czechia, Cyprus, Estonia, Poland, and Romania. Instead, Malta and Bulgaria witness rising wage disparities, despite improvements in non-cost competitiveness. Wage disparities declined in Greece, despite losses in non- cost competitiveness. Thus, although non-cost competitiveness typically comes along with higher productivity and wages, as argued above, it does not necessarily result in a more even distribution of wages. This highlights the important role of policies in ensuring that wage growth adequately reflects productivity gains (Section 2.5).
Several structural factors may have hindered productivity and non-cost competitiveness gains to translate into a more even wage distribution. Examples are the twin transition, globalisation, the ongoing shift of economic activity towards services and the development of alternative forms of work. These factors, among several others, can be important engines of job creation and productivity. However, they also may have contributed to a decline in unionisation rates and workers’ bargaining power, a decline in labour shares, or wage disparities in some countries and sectors . Competitiveness pressures can also lead to less generous social policies, which may exacerbate income inequality. Understanding how these factors affect different groups of workers is key to design effective policies to boost productivity competitiveness and wage growth at the same time (see Section 2.5). A comparison of productivity, wage, and inequality developments between the EU and US reveals that the EU is characterised by lower productivity and lower wage growth, but also lower inequality (Graph A2.1.4 in the annex) .
Graph 2.13: Non-cost competitiveness, real wages, and the wage distribution, 2012-2023
Note:
Real compensation is deflated using the HICP index
Source:
Eurostat [tipsex11; tipser13] and own calculations based on EU SILC microdata, Ameco [UWCD.1.0.0.0; NWTD.1.0.0.0; ZCPIH.1.0.0.0].