ECB sees real wages declining despite ‘very strong’ nominal growth

WAGE growth across the eurozone will be “very strong” over the next few quarters, but real wages are still likely to decline given rapid inflation, the European Central Bank (ECB) said in an article on Monday (Jan 9).

A historic surge in inflation has eroded real incomes over the past two years. Companies are finally starting to adjust wages, leading to worries that high inflation could be perpetuated if wage-setting is adjusted on a more permanent basis.

“Wage growth over the next few quarters is expected to be very strong compared with historical patterns,” the bank’s staff economists said. “This reflects robust labour markets, that so far have not been substantially affected by the slowing of the economy, increases in national minimum wages, and some catch-up between wages and high rates of inflation.”

But the expected economic slowdown and uncertainty about the outlook are likely to put downward pressure on wage growth beyond the near term, they added.

ECB president Christine Lagarde recently argued that wages were probably rising more quickly than predicted, and the ECB would need to stop this from pushing up longer-term inflation expectations.

However, the bank appeared to play down wage concerns in Monday’s article, instead saying that real incomes will continue to fall, as inflation remains higher than the robust increase in nominal wages.

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“Real consumer wages are now substantially lower than before the pandemic, and are likely to fall further in the coming months,” the economists said.

“This could lead trade unions to demand higher wage increases in upcoming negotiation rounds, especially in sectors with lower wages.” REUTERS