Easing Wage Pressures in the Euro Zone

FRANKFURT (Reuters) – Wage pressures are easing across the euro zone, largely due to reduced additional compensation beyond negotiated wages, contributing to a likely moderation in inflation, according to a European Central Bank study published on Wednesday.

Over recent years, wage growth has been significant, mainly driven by what is termed “wage drift,” referring to actual payments made to employees beyond negotiated wages. Wage drift has been influenced by bonuses, inflation compensation payments, and increased hours worked. However, recent data indicates a narrowing gap between negotiated and actual payments, suggesting inflation pressures may ease as the ECB has long anticipated.

The ECB stated, “We are now at a point in the disinflation process where the upward pressure coming from wage drift is easing.” The current moderation in the growth of compensation per employee is attributed to a decrease in wage drift.

Going forward, negotiated wage growth is expected to become the primary indicator for the ECB, although signs of moderation are also evident there.

In the second quarter, negotiated wage growth decreased to 3.5% from 4.8% in the previous three months, marking its lowest level since late 2022. While this rate still exceeds the 3% benchmark aligned with the ECB’s 2% inflation target, the central bank remains hopeful that a further slowdown will help bring price growth down to its target by late 2025.

However, Germany, as the largest economy in the euro zone, anticipates significant wage increases into 2025, leading to some skepticism regarding the ECB’s forecast. The ECB noted, “As inflation compensation is increasingly embedded in collective wage bargaining, high negotiated wage growth has been sustaining the current levels of growth in compensation per employee.”

The ECB also stated, “As the inflation surge has passed, there may be some residual real wage catch-up, but the upward pressure on negotiated wage growth is likely to subside.”