Wage growth in the eurozone rises to a fresh high

Euro zone wages rose at a record pace between the last quarter of 2022 and a year earlier, underscoring why many central bankers worry that inflation will be difficult to tame.

Figures released by Eurostat, the European Union’s statistics agency, on Friday showed that hourly labor costs in the eurozone rose by 5.7 percent in the period.

Growth in hourly wage costs, which include wages and non-wage costs such as taxes, rose from 3.7 percent in the previous quarter to reach the highest level since such data began being collected for the euro area in 2010.

The increase means that wage growth in the eurozone now exceeds the United States, where unit labor costs per hour for non-agricultural workers in the same period increased 4.9 per cent. But the eurozone figure remains below the 6.7 percent growth in UK wages excluding bonuses.

Signs that wage growth is accelerating and putting upward pressure on prices in the single currency bloc is one of the major concerns for 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 of the factors that “could drive inflation higher” as she announced her decision to raise her deposit rate from 2.5 percent to 3 percent on Thursday.

Other members of the ECB’s governing council said on Friday that it would be necessary to raise interest rates further. Slovak central bank chief Peter Kažimír said it was “not yet at the finish line” and his Lithuanian counterpart Gediminas Šimkus said this week’s rate hike “was not the last”.

Recent wage deals since the start of this year and eurozone unemployment near a record low of 6.7 percent in January pointed to further increases in wage growth. This would keep price pressure high – especially in the wage-sensitive service sector.

In the period from the fourth quarter of 2021 to 2022, there were double-digit increases in seven out of 27 EU countries, including Poland, Bulgaria, Slovenia and Lithuania. German hourly labor costs rose 6.3 percent, the highest since such data began to be collected in 1997, according to Eurostat.

Deutsche Post struck a pay deal last weekend for 160,000 employees to avert a strike by German postal workers by giving them €3,000 in one-off payments over the next year plus a €340 increase in monthly pay the following year. The Verdi union said it put forward an 11.5 percent pay rise, but the Bundesbank calculated it increased wages by just over 7 percent.

“Previous data shows the labor market remains strong, suggesting wage growth will remain high this year,” said Jack Allen-Reynolds, economist at research group Capital Economics. “While the outlook for monetary policy is very uncertain, the wage and price data send a clear message.”

However, higher wages have not been enough to offset the increase in workers’ living costs. Inflation rose 8.4 percent in the eurozone last year, leaving many people with a pay cut in constant prices.

However, economists expect inflation to fall sharply this year – the ECB expects it to slide from 7.8 percent in the first quarter of this year to 2.8 percent in the fourth quarter – which is likely to reduce pressure on wages.

“Private sector wage growth in the euro area is likely to pick up further at the start of this year, and a wage price spiral is a risk, but for now we still think wage growth will fall in line with inflation,” says Claus Vistesen, an economist at Pantheon Macroeconomics.

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