Global Macro Service > Research Briefings > Eurozone

Wage growth is recovering, but the trend is subdued

We expect eurozone wage growth will pick up sharply this year and next, but that mostly reflects a rebound after 2020’s deep plunge. Underlying trends will remain subdued given elevated labour market slack and weak firm profits. The current crisis and its effect on wages is unprecedented. Pay indicators have been altered by the nature of the crisis and the fiscal response, meaning negotiated wages now provide a better gauge. And these have slowed to lows last seen in the mid-2010s following the financial and sovereign debt crises. Labour market slack will remain a headwind. Elevated unemployment, workers on furlough schemes, and the drop in participation rates have weakened workers’ negotiating power. We expect the unemployment rate to start decreasing slowly in H2, but it could take up to three years before joblessness is back to pre-pandemic levels.In addition, businesses saw their operating margins squeezed last year, and despite some recovery, their gross operating surplus remains depressed, providing no space to raise wages. Firms will also struggle to increase prices during this precarious time, and despite a brief surge in inflation, we don’t see sustained price hikes. Despite these obstacles, we think the economic recovery and normalized labour markets will allow wages to rebound. Our Philips Curve model suggests some room for wage growth given the trend reversal in unemployment, solid productivity gains, and temporarily higher inflation expectations. This should support consumption and, to a lesser degree, the inflation outlook.

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