Labour costs in the eurozone have fallen for the first time in a decade, slipping 0.1 per cent in the three months to June from a year ago despite rising consumer price inflation and falling unemployment.
The slight drop in wages and non-wage costs in the 19-country bloc runs contrary to fears that a recent acceleration in price growth and an improved labour market could feed into higher pay demands from workers.
Eurostat, the EU’s statistics arm, said the latest data should be considered in light of a sharp increase in labour costs shortly after the pandemic hit in the second quarter of 2020, when they rose 4.3 per cent from the previous year.
This means labour costs have risen by an average of just above 2 per cent over the past two years, in line with typical levels over the past decade.
“These headline figures appear at odds with the reopening of the economy in the second quarter and the frequent media reports of labour shortages,” said Jessica Hinds, an economist at Capital Economics.
“This can primarily be explained by base effects; total hours worked slumped in the second quarter of 2020 due to lockdowns and furlough schemes, which pushed up hourly wage growth,” said Hinds. While wage growth is unlikely to remain as weak as the data suggested, she predicted it would remain “fairly subdued” due to “spare capacity” in the labour market.
Consumer price inflation in the eurozone rose to a decade high of 3 per cent in August — above the European Central Bank’s 2 per cent target, stirring fears that soaring energy prices and supply chain bottlenecks could continue to push prices higher.
But the ECB expects inflation to fall back below its target next year and its president Christine Lagarde said last week that while it would be “very attentive” to the autumn wage negotiations, “we don’t expect these wage increases and these wage negotiations to be very strong”.
There have been few signs that inflation is feeding into higher wages, although Germany’s Verdi union recently asked for a 5 per cent pay rise for 1.1m public sector workers. German train drivers have been striking to demand higher pay and some bars and restaurants in Paris and Berlin have also boosted pay to fill vacancies.
Wages are index-linked for many workers in countries such as France, Spain and Belgium, which means they will rise automatically in response to higher inflation. Carsten Brzeski, head of macro research at ING, said: “If you throw in the supply chain issues, this all points to higher wages next year.”
Eurostat said hourly wages in the second quarter fell 0.8 per cent among euro area businesses from the previous year and rose 1.7 per cent in other areas of the economy, including the public sector.
The sectors with the biggest falls were accommodation and food services, where wages fell 4.5 per cent, and transportation and storage, where they dropped 1.8 per cent. The biggest increase was a 3.3 per cent rise in the wages of human health and social workers.
Meanwhile, there was a further sign that the eurozone economy made a strong start to the third quarter, after industrial production in the bloc outstripped economists’ expectations by rising 1.5 per cent in July from the previous month, taking it back above pre-pandemic levels.
Economists at Morgan Stanley said July’s strong data “suggest that the euro area manufacturing sector may be adapting to the persistent semiconductor shortages and broader shipment bottlenecks”.
Source: Economy - ft.com
