The European Central Bank published an Economic Bulletin article analysing euro area wage developments during and after the high inflation episode, concluding that the exceptionally strong wage growth in 2022-24 was driven primarily by compensation for past inflation and real wage catch-up, supported by tight labour markets. As inflation has declined and labour demand has started to ease, the analysis indicates that wage growth is gradually moderating, although wages remain a key channel for assessing inflation persistence. The article documents sizeable differences across wage indicators and their timing, including pandemic-related statistical distortions in compensation per employee (CPE) and compensation per hour, while negotiated wages were less affected. CPE growth rose above 4% in 2022 and above 5% in 2023, while negotiated wage growth increased more gradually from just above 1% in 2021 to close to 3% in 2022 and above 4% in 2023, with early strength in “wage drift” partly reflecting the recovery in hours worked and firm-level inflation compensation. An augmented wage Phillips curve framework finds a strong backward-looking element in wage formation, with past inflation and short-term inflation expectations explaining much of the wage acceleration and subsequent disinflation, while specifications using long-term inflation expectations imply a lower inflation pass-through to wages; productivity plays a negligible, mainly negative role. Using granular collective bargaining data from the ECB wage tracker, the article highlights how contract duration shapes adjustment speed and reports that 54% of covered workers are on contracts longer than two years; with more than 30% of covered agreements expiring in 2024 and a further 15% expiring in the first half of 2025, the forward-looking tracker points to most renegotiations resulting in lower wage growth through the second quarter of 2025, alongside base effects from one-off payments weighing on measured negotiated wage growth in 2025.
European Central Bank 2025-02-12
European Central Bank research links the post-pandemic wage surge mainly to inflation catch-up and points to easing wage pressures
The European Central Bank's Economic Bulletin analyzes euro area wage developments, noting strong wage growth in 2022-24 due to past inflation compensation and tight labor markets. As inflation declines and labor demand eases, wage growth is moderating, though wages remain crucial for assessing inflation persistence. The article highlights differences in wage indicators, the role of contract duration, and anticipates lower wage growth through mid-2025 due to renegotiations and base effects from one-off payments.