European workers see cost of living rising, but wages are not keeping pace

The unemployment rate in Europe has fallen below its pre-pandemic level, but a rise in wages this year does not seem likely even as higher inflation has weakened the purchasing power of workers, economists and the responsibles.

At 7.3%, the euro area unemployment rate was lower than pre-pandemic levels in October, after reaching a pandemic high of 8.6% in September 2020. The relatively small size of these fluctuations, according to economists, is in large part due to leave programs, in which governments essentially paid companies to keep workers idle as employees during the pandemic, rather than letting them go, by covering much of their wages. .

At their peak, these programs supported tens of millions of workers across the currency area, but have since declined dramatically.

Because so many workers were still employed but not working as much, economists see the number of hours worked as a better indicator of how much slack in the euro area labor market as the economy has adapted. to successive waves of Covid-19 infections.

And these figures show that workers in the eurozone in the three months to September were still working 2% fewer hours than in the last three months of 2019. For many economists, this suggests that businesses should be able to increase their production without having to pay heavily. higher wages to attract workers.

“There is more slack, so the barrier is higher for wage growth to accelerate sharply,” said Sven Jari Stehn, chief European economist at Goldman Sachs.

Since the end of the third quarter, new Covid-19 infections have increased sharply in the euro area, driven initially by the Delta variant and more recently by Omicron. This led to new activity restrictions that pushed some workers back into leave programs, increasing the slack in the labor market. In Germany, the Ifo research institute estimates there were 608,000 workers on leave in November, up from 598,000 in October, but still a fraction of the six million at the peak of the program in April 2020.

So far, wage increases have been very moderate despite the drop in the unemployment rate and an upturn in job vacancies. According to the European Union’s statistics agency, hourly wages in the euro area were 2.5% higher in the three months to September than a year earlier.

This is much smaller than the 4.5% increase in the average hourly wage in the United States in the 12 months through September. This difference may be due to European leave programs, according to economists.

Because workers in these programs have remained committed to their employers, Europe has experienced less of a labor rush than the United States with parts of the economy reopening and fewer opportunities to workers to demand higher wages.

In addition, the share of Europeans working or looking for work appears to have fallen less than in the United States, where the participation rate was 61.6% in June 2021, down 1.7 percentage points from to December 2019. In the euro area, the workforce -The force participation rate of 64.3% in the second quarter of 2021 fell only 0.6 percentage point compared to the last three month of 2019.

While the European labor market is a bit more slack than at the end of 2019, inflation is much higher, more than double the European Central Bank’s target of around 2% over the years. last months.

But so far, the ECB sees little sign of what it calls “second round effects”, or of workers demanding wage increases to offset losses in real purchasing power that would in turn trigger further price increases as companies scramble to cover higher labor costs.

This is one of the reasons why the central bank plans to continue its bond buying program until 2022 and has signaled that it sees little prospect of a hike in its key rate during the l year, unlike the Federal Reserve, which plans to end its bond purchases by March and forecast interest rate hikes of three-quarters of a percentage point in 2022.

“The numbers do not tell us that we are seeing second round effects and that the wage negotiations have yielded or are about to yield figures which would actually lead to second round effects,” said the President of the ECB Christine Lagarde to reporters last month.

However, the ECB recognizes that the longer inflation stays above its target, the more likely it is that workers will demand large wage increases to preserve their purchasing power. And in mid-December, the ECB said the inflation rate will likely average 3.2% in 2022, down from a September forecast of 1.7% on average.

A Christmas market closed in Vienna on November 22.


Photo:

Akos Stiller / Bloomberg News

Unions are seeking larger pay increases than those recorded in the third quarter, especially when companies made large profits during the pandemic, or when workers became significantly more productive.

“Salary increases are also important in recognizing that many workers have helped run our societies during the pandemic,” said Esther Lynch, deputy general secretary of the European Trade Union Confederation, which represents 45 million workers. “This not only deserves applause, but should also be rewarded financially. “

However, it seems unlikely that unions will push for large pay increases across the board, having focused over the past decades on keeping jobs in the face of competition from low-wage locations in Western Europe. ‘East and Asia rather than maximizing short-term wages.

“Trade unions generally take a long-term view in wage negotiations, basing their demands on trend productivity and the ECB’s inflation target,” Lynch said. “It helps stabilize the recovery.”

Write to Paul Hannon at [email protected]

Copyright © 2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Mary I. Bruner