Rising energy prices have led to a severe inflationary crisis, which in turn has fueled demands for higher wages. At present, however, the (nominal) increase in average wages is not keeping up with inflation.

For example, in Greece the average nominal wage increased by 3.3% in the last quarter of 2022 compared to the same quarter of the previous year. But, in the same period, inflation was 8.6%. Consequently, the average real wage fell by 4.9%.

According to recently published Eurostat data, the same happened in almost all EU countries. With the exception of Bulgaria, where the average real wage increased slightly (+1.8), and Slovenia where it remained almost stable (0.8 %), in the remaining 25 Member States inflation outpaced wage growth. Across the EU as a whole, the fall in real average wages in the fourth quarter of 2022 (year-on-year) was 5%. In the major economies of the Eurozone, the decrease was 6.4% in Italy, 5.3% in Germany, 2.3% in Spain and 1.4% in France.

A number of reasons explain why real wages declined less in some countries compared to others: the different levels of inflation in each country, the proportion of wage earners working in export-oriented firms (since exposure to international competition does not allow high wage growth), the bargaining power of workers (which depends on the level of unemployment, but also on the influence of labor unions, i.e. on the number of their members and on the percentage of those covered by collective agreements) etc. Also, an important role is played by the governments’ policy choices regarding e.g. raising the minimum wage (in countries where it is set by the government and not through collective bargaining).

Despite the variations, real wages seems to concern all developed economies. In a recent report, the International Labor Organization estimates that among advanced G20 countries real wages in the first half of 2022 are estimated to have declined to –2.2 per cent. The report points out that the inflationary crisis is reducing the purchasing power of the middle classes and hitting low-income households particularly hard leading to increased inequality and poverty.

So far, most analysts have insisted on the need to avoid the historic upward wage-price spiral of the 1970s and 1980s that deepened the recession. For example, Luis de Guindos, vice-president of the ECB, said in a recent interview that if unions demand excessive pay raises based on 2022 inflation, this could jeopardize the projected decline in inflation in 2023 leading to a wage-price spiral.

The need to avoid the wage-price spiral is not disputed. As stated in a recent ELIAMEP working paper, the demand for large wage increases in the 70s and 80s ultimately led to the defeat of the unions and the abolition or weakening of the automatic wage indexation mechanisms that were in place. The question that remains is how to compensate workers and low-income households for rising prices in conditions of wage restraint.

Furthermore, until recently the responsibility of businesses, whose corporate profits are particularly high, was absent from the discussion. That appears to be changing:  when announcing the decision to raise rates, the ECB president mentioned that “(…) higher than anticipated increases in wages and profit margins, could drive inflation higher”.  The impact of the pursuit of higher profitability on rising inflation will be the subject of the next Infocus.