Eurozone wage growth reaches new high

Eurozone wages rose at a record pace between the last quarter of 2022 and a year earlier, highlighting why many central banks fear inflation will be difficult to tame.

Numbers published by Eurostat, the EU’s statistics agency, on Friday showed hourly labor costs in the eurozone increased by 5.7 percent over the period.

Growth in hourly labor costs, which includes wages and non-wage costs such as taxes, increased from 3.7% in the previous quarter to the highest level since data collection began for the euro area in 2010 .

The rise means that wage growth in the euro area is now outpacing growth in the US, where the hourly unit cost of labor for non-agricultural workers increased by 4.9 percent over the same period. But the eurozone indicator remains below 6.7 percent growth. wages in the UK excluding bonuses.

A line chart of the labor cost index (% annual growth) showing that wage growth is reaching an all-time high in the euro area.

Signs that wage growth is accelerating and upward pressure on prices in the single currency bloc is one of the biggest concerns of the European Central Bank, which raised interest rates for the sixth time at its meeting on Thursday.

ECB President Christine Lagarde said higher wages were one factor that “could boost inflation” when she announced her decision to raise the deposit rate from 2.5 percent to 3 percent on Thursday.

Other members of the ECB’s governing council said on Friday that further rate hikes are needed. Slovakia’s central bank governor Peter Kazimir said it was “not the finish line yet”, while his Lithuanian counterpart Gediminas Simkus said this week’s rate hike “was not the last”.

Recent wage agreements since the beginning of this year and the eurozone unemployment rate close to a record low of 6.7 percent in January point to a further increase in wage growth. This will keep price pressure high, especially in the wage-sensitive service sector.

Between the fourth quarter of 2021 and 2022, seven of the 27 EU countries, including Poland, Bulgaria, Slovenia and Lithuania, experienced double-digit growth. According to Eurostat, the hourly cost of labor in Germany rose by 6.3 percent, the highest since such data began to be collected in 1997.

German post office last weekend agreed a wage agreement for 160,000 employees to prevent a strike by German postal workers by paying them €3,000 in one-time payments over the next year plus a €340 monthly salary increase next year. The Verdi union said this resulted in an 11.5% increase in wages, but the Bundesbank calculated that wages increased by just over 7%.

“More timely data shows that the labor market remains strong, which suggests that wage growth will remain strong this year,” said Jack Allen-Reynolds, an economist at Capital Economics research group. “While the outlook for monetary policy is highly uncertain, the wage and price data are sending a clear signal.”

However, wage increases were not enough to offset the rise in the cost of living for workers. Inflation in the eurozone surged 8.4 percent last year, causing many people to take pay cuts in real terms.

However, economists expect inflation to ease sharply this year – the ECB forecasts it to fall from 7.8% in the first quarter of this year to 2.8% in the fourth quarter – likely to ease pressure on wages.

“Eurozone private sector wage growth is likely to pick up even more early this year and rising wage prices are a risk, but for now we continue to believe that wage growth will be in line with inflation.” said Klaus Wiestesen, an economist at Pantheon Macroeconomics.