Wage developments and their determinants since the start of the pandemic

= Wage developments and their determinants since the start of the pandemic =

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Provider:

ECB

URL:

https://www.ecb.europa.eu//pub/economic-bulletin/articles/2023/html/ecb.ebart202208_02~2328747465.en.html

Retrieved on:

Monday, January 16, 2023

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Geotags:

UKRAINE, UNITED STATES, BANDERA, GERMANY

Summary

Key Points:

= Wage developments and their determinants since the start of the pandemic =
Published as part of the ECB Economic Bulletin, Issue 8/2022.
The coronavirus (COVID-19) pandemic has greatly affected labour markets and wage growth indicators in the euro area.
The combination of these factors has made assessing underlying wage pressures and the outlook for wage growth extremely challenging.
Wage growth indicators have been extremely volatile since the start of the pandemic, partly owing to the impact of job retention schemes, complicating the assessment of wage developments.
Different statistical treatments of these support measures have also made it difficult to compare wage developments across euro area countries.
In this unusual economic environment, standard empirical models provide only limited help in analysing wage developments in the euro area.
Normally, wage developments can be assessed against empirical regularities by observing the Phillips curve, which links wage growth to economic or labour market slack, past and/or expected inflation, and productivity.
This article discusses wage developments and the main factors that have influenced them since the start of the pandemic.
First, it reviews developments in a broad range of wage measures for the euro area since the start of the pandemic and discusses their usefulness as signals of wage pressures.
Second, the article looks at how wage developments have differed across sectors, reflecting the heterogeneous impact of the pandemic shock.
A key indicator in the assessment of wage growth in the euro area is the annual growth rate of compensation per employee.
The differences in the growth rates of different wage measures have moderated over time but remain substantial.
For example, in the second quarter of 2022 indicators of year-on-year wage growth ranged from 2.4% (negotiated wages) to 4.5% (compensation per employee).
Total labour input at the start of the pandemic fell substantially, by around 16%, owing mainly to the drop in hours worked per employee.
CPE growth can be decomposed into negotiated wages, social security contributions, hours worked per employee and the residual wage drift.
A principal component analysis of wage growth indicators and negotiated wage growth can also be used to assess underlying wage measures.
[10] Estimating the common drivers across a range of wage indicators also suggests that wage pressures have remained moderate.
Another way to mitigate the impact of pandemic-related distortions in the assessment of wage pressures is to estimate underlying wage growth pressures across different wage indicators.
Overall, underlying wage growth has been relatively moderate since the start of the pandemic, and it now stands close its long-term trend.
Wage growth has varied greatly across the main sectors of the economy since the start of the pandemic.
This is because developments in wage growth as a cost factor were broadly similar to those for the price of output.
Developments in real producer prices have diverged strongly across different sectors of the economy, with implications for expected wage and price pressures.