Eurozone wages rose 5.3%, matching a previous record, and the ECB cited rising wages as a risk to the inflation outlook.
From WOLF STREET by Wolf Richter.
IG Metall, Germany’s largest trade union representing workers in the automotive, metals and electrical components industries, today announced that it will begin negotiations with the companies whose workers it represents, asking for a 7% wage increase for 12 months for its 3.9 million members. The wage increase is meant to make up for the inflationary impact that households have been enduring. And this is now a big trend. To make up for the inflationary impact in 2022 and 2023, wage increases are needed. And big wage increases.
And data released today showed that wages and salaries in the 20 eurozone countries rose 5.3% year-on-year in the first quarter, matching the record for the fourth quarter of 2022. And this wage growth came despite economic growth being just above zero for a year and a half, except for a dip below zero in the fourth quarter.
After two years of almost zero economic growth, wages and salaries rose 6.3% year-on-year in Germany, 7.6% in the Netherlands, 9.8% in Austria, 7.9% in Greece, 6.3% in Portugal and 4.5% in Spain. The lowest rates were in France (+2.6%) and Italy (+3.3%).
The data came 11 days after the ECB cut its benchmark interest rate by 25 basis points on June 6. Many observers, accustomed to ECB interest rates at 0% or negative, had hoped the cut would lead to a longer series of rate cuts.
But wage growth is included among the “upside risks” to the ECB’s inflation outlook and has been on the ECB’s list of concerns for some time. The rate cut announcement was emblazoned with a number of hawkish comments, including “domestic price pressures remain strong due to rising wage growth.”
The ECB has its own measures of wage growth based on collective bargaining agreements negotiated between employers and organizations representing workers. These are forward-looking measures, as they are wage increases that will soon be implemented. Negotiated wages cover around two-thirds of the euro area economy. These “negotiated wages” do not include bonuses, overtime pay and other individual remuneration not linked to collective bargaining.
In the first quarter, “negotiated wages” rose 4.7% year-on-year, matching the euro area’s third-quarter 2023 record.
Large increases in wages and salaries are great for households: they have more money to spend, they feel better, they spend more, which increases demand and employment, and stimulates economic growth. This is great.
Strong wage increases also fuel continued inflation through higher demand for goods and services and higher labor costs for businesses to provide those goods and services.
Inflation in the euro area has fallen sharply, with core CPI at 2.7% year-on-year in April. However, core CPI accelerated again in May to 2.9%. The ECB’s inflation target is 2%.
Workers desperately need wage increases to regain purchasing power after the inflation spike of 2022 and 2023. At the same time, wage increases are one of the factors that will make inflation run even faster after it starts, which is why inflation is so hard to eliminate.
Enjoy reading WOLF STREET and want to support us? You can donate, we’d be so grateful! Click on Beer and Iced Tea Mugs to find out how.
Want to be notified by email when WOLF STREET publishes a new article? Sign up here.