Wage developments and their determinants since the start of the pandemic
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Monday, January 16, 2023
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= Wage developments and their determinants since the start of the pandemic =
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.