In the Global Wage Report issued at the end of last year, the ILO observed that real wages in developed economies had suffered a double dip by falling in 2008 and again in 2011.
In the Euro Area, real wage trends are different but at the same time also more problematic. According to the Commission’s recently released spring forecasts, the growth rate of Euro Area nominal wages took a firm dive below of 2% already from 2009 on. This resulted in a fall of 0.3% in real wages in 2011 and another -0.3% fall in 2012. In 2013 and 2014, the European Commission expects real wages to stay close to stagnation (0.2%).
These are average figures for the Euro Area. Behind these averages is hiding the fact that real wages have fallen quite significantly in a number of member states. In 2012 for example, Greece and Portugal registered a fall of around 5%, whereas real wages are falling by around 2% in Spain and Italy.
Moreover, these falls in real wages add up, year after year. In Greece and Spain real wages have now fallen for five consecutive years. In Italy and Ireland real wages will have been going down over a period of four years. If we start counting from 2009 on and until 2014, real wages per worker will have gone down by 22% in Greece, 7% in Spain and Portugal, 5% in Ireland and 2 to 3% in Austria, the Netherlands and Italy (see graph). In fact, real wage increases in the Euro Area over these past years have been limited to just two countries: Germany and Finland.
Compounded evolution of real wages since 2009
Austerity and structural reforms are to blame
These dismal trends do not come as a surprise. They are the direct result of the policies which have been pursued. First, there’s the stubborn quest for fiscal austerity, pushing economic activity down and unemployment up, and with workers’ bargaining position suffering as a direct consequence. In addition, several of these countries have weakened the systems of wage bargaining and wage protection themselves. This has been done in many different ways: The legal extension of collective agreements has been limited or abolished (Greece ,Portugal, Spain), the level of minimum wages has been cut, (Greece) and company level associations of workers have been allowed to sign agreements taking priority over collective agreements bargained by representative trade unions (Greece, Portugal). With structural reforms such as these, no wonder wages are going down.
Wages down, economy down
The ILO report mentioned above warned against exactly this policy of competitive wage cuts that is now being implemented across a major part of the Euro Area. We quote: “If pursued simultaneously, competitive gains will cancel each other out and the regressive effect of wage cuts on domestic demand would dominate and lead to a worldwide depression”.
Here, Eurostat’s latest estimate of quarterly growth at the beginning of 2013 is yet another cold shower. The Euro Area’s economy is now in recession for six quarters in a row. Europe’s obsession with overambitious deficit targets is certainly to blame for dismal growth performance but another part of the responsibility is to be attributed to this ongoing wage race to the bottom. The lack of real wage growth implies that one of the pillars of aggregate demand dynamics is also lacking.
A related concern is the news coming from the inflation front, with inflation in the Euro Area falling rapidly from 2% in January down to 1, 2% in April. Such low inflation rate is way below the ECB’s official target of price stability (‘below but close to 2% inflation’) and once again testifies to fact that wage deregulation combined with fiscal austerity have substantially weakened the Euro Area economy.
Euro Area arithmetic’s: Can Germany the wage locomotive for the Euro Area?
The attentive reader will observe that the average wage outcomes for the Euro Area would actually be a lot worse, were it not for the revival of wage dynamics in Germany; Thanks to nominal wage increases of 3% in Germany, average Euro Area real wage dynamics manage to stay clear from are kept from falling again below zero in 2013 and 2014.
This raises the question whether wages in different parts of the Euro Area can function as a sort of ‘communicating barrel’. The idea here is that real wage cuts in the ‘deficit’ countries are not really a problem as long as these are being offset by corresponding wage hikes in surplus countries such as Germany, an idea that is surprisingly rather widespread in circles of left wing German economists (for one example see here).
Apart from the fact that this is based on the hypothesis that Euro Area surplus and deficit countries are competing with each other on the basis of comparable products and sectors (a hypothesis which is questionable see http://www.socialeurope.eu/2011/02/european-economic-governance-the-next-big-hold-up-on-wages), there’s a basic arithmetical problem.
We can illustrate this problem by using the Commission’s wage forecasts for 2014. Euro Area nominal wages would increase by 1, 8% this year. From the point of view of the ECB’s price stability target, this 1, 8% is largely insufficient. If the ECB’s price stability target were to be respected, nominal wages would need to grow by 2, 9% (this equals the sum of productivity of 0, 9% and the ECB’s 2% inflation target).
Given the weight that Germany has in the Euro Area’s economy, wages in Germany would need to increase from 3% (the actual figure in the Commission’s spring forecast) to around 6,5%. This will then lift average Euro Area wage dynamics up from 1,8 to 2,9%., also resulting in a return to 2% inflation accompanied by a 1% real wage growth on average in the Euro Area.
However, wage increases in the order of 6, 5% for the entire German economy are a long way off. In fact, wage hikes such as these have only been seen in the aftermath of German unification, a period that is quite exceptional.
So, instead of cherishing the – presumably vain – hope that German wage bargainers would suddenly become so exuberant that they salvage the average wage trend of the entire Euro Area, it would be more preferable that politicians across the rest of the Euro Area would refrain from engaging further in new rounds of downwards wage competition and deregulation of wage formation systems.