By Sotiria Theodoropoulou, senior researcher, ETUI
Economic recovery seems at long last to have taken off in Europe, reaching even those countries that suffered the most during the crisis. While the European Commission and European Central Bank (ECB) officially gloss over the historically high output growth and employment rates, especially in the Eurozone, there are still concerns. Most notably, wage growth has remained weak compared with what previous experience would have predicted.
Normally, higher economic growth and lower unemployment result in stronger wage and price increases: that is, wage and price inflation. Economists, especially in central banks, monitor closely how fast wages increase when unemployment falls (what they call the Phillips curve) as this is a relationship that greatly influences monetary policy decisions. However, in the last year, academic and policy economists on both sides of the Atlantic have been wondering whether this relationship no longer holds, given the weakness in wage growth.
This has been a particular concern for the ECB, which has embarked since 2015 on unconventional monetary policy measures, buying financial assets from secondary markets in Europe and pushing its discount rates below zero. Although these policies have been necessary to prevent the Eurozone economy from sliding into negative price growth, given the failure of fiscal policies in Europe to pull their weight, they come with risks of generating financial asset bubbles and have been strongly opposed most notably by German policy-makers. Dissenting voices against negative interest rates and quantitative easing have been gaining strength as output growth has been gaining pace.
The analysis of the European Central Bank itself suggests that weak wage growth indicates that there is still a lot of slack in European labour markets. Many people are employed for fewer hours than they would wish (involuntary part-timers), while there are also ‘discouraged’ workers who would like to find jobs but are not actively seeking. As ETUI analysis has also pointed out, although the number of jobs has recovered, the number of hours worked remains below 2008 levels, while many of the jobs created are of poor quality, for example temporary as opposed to permanent and involuntarily part-time. Output and employment growth result in higher wages when they create sufficient security for workers to bargain wages. Currently, this mechanism seems to be failing.
Weak wage growth is also a problem insofar as, according to the European Commission analysis, recovery is currently led by private consumption, while the investment gap is still there. Strong private consumption requires high household incomes, of which wages form the largest part. On the other hand, continued weakness in investment has been linked to weak expected demand. The persistent investment gap is undermining the future capacity of economies and wages to grow.
These concerns have been reflected to some extent in policy statements and recommendations from both the ECB and the Commission. Mario Draghi has publicly declared that he would hope to see high wage increases this year. The Commission in its recommendation for economic policies in the Euro area for 2018 has repeated that Member States with current account surpluses should take steps to increase domestic demand, but for the first time this year it has also called explicitly for wage increases in order to achieve this goal. These calls resonate with the current campaign by European trade unions for pay rises. Stronger wage growth is not just a matter of social fairness, following years of policies of internal devaluation and fiscal austerity which put the main burden of adjustment on wage earners and the unemployed, but also of economic necessity.