European workers are anticipating a boost in their incomes during this year’s pay round to counter the impact of rising prices. However, this expected surge in purchasing power may pose a challenge to the European Central Bank’s (ECB) efforts to maintain inflation within its target range.
The ECB has identified wages as the most significant risk to its ongoing battle against inflation, forecasting salary growth across the euro zone to be 4.6% in 2024, surpassing the 3% pace it deems consistent with achieving its 2% inflation target. The potential for higher wage settlements poses a risk to anticipated interest-rate cuts, which financial markets are predicting to commence in April.
Reamonn Lydon, an economist at the Central Bank of Ireland and a contributor to the Indeed Wage Tracker, commented on the potential path to 3% wage growth, acknowledging the challenges ahead.
After experiencing a roughly 5% decline in real wages in 2022-23, wage-earners are now inclined to push for better compensation, leveraging factors like cooling inflation, low unemployment, and healthy corporate profit margins. This marks a crucial opportunity in the economic cycle for labor unions to restore workers’ living standards.
Global companies such as Tesla and Amazon are already contending with strikes in Europe, reflecting the readiness of workers to assert their demands. Despite the absence of real-time wage data for the 20-country euro zone, the Indeed Wage Tracker, which monitors advertised salaries, is closely monitored by the ECB as an indicator of future trends. December saw a modest increase to 3.8%, compared to the peak of 5.2% recorded in October 2022.
Recent settlements include wage hikes of 4.5% for employees at Carrefour stores in Spain, 5.0% at TotalEnergies in France, and 6.6% for Dutch rail workers. Uber drivers in France saw their minimum hourly rate rise by 17.6%, while minimum wages in Germany, the Netherlands, and Spain also experienced increases.
Labor unions, buoyed by recent worker shortages, aim to reverse the trend of declining membership accelerated by globalization in the 1990s. Unions are emboldened to demand wage increases, with instances such as French EDF employees seeking a 6% raise and German rail workers rejecting an 11% rise for a shorter working week.
While these demands may strengthen unions’ bargaining positions, there are concerns that excessive “wage militancy” could prompt the ECB to keep interest rates higher to curb demand, potentially triggering a wage-price spiral. Some propose smaller, tax-free, one-off increases financed by taxes on excess corporate profits to mitigate this risk.
Despite these challenges, signs of a wage-price spiral are limited for now, and most economists expect companies to absorb higher wage costs, given the overall stagnant outlook for the European economy. However, rising trade protectionism limiting access to cheaper labor markets could contribute to higher inflation and interest rates.
Investors are gaining confidence in sustained higher wage growth, driven by factors like labor’s increased share and deglobalization, reinforcing the persistence of inflation and challenging a swift return to zero interest rates.