Social Europe

politics, economy and employment & labour

  • Themes
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Are workers going to pay the bill for Putin’s war?

Malte Lübker and Thilo Janssen 7th September 2022

Real wages could fall by 2.9 per cent in the European Union in 2022.

wages,labour share,profits,collective bargaining,unions
Wages across the EU are taking an unprecedented hit (Rosie Apples / shutterstock.com)

In the current year, workers across Europe are likely to suffer a substantial decline in the purchasing power of their wages. This holds true for every country in the European Union, with an average anticipated fall in real wages of 2.9 per cent. The depth and breadth of this wage decline are unprecedented. Nor are these the predictions of doomsayers but the official forecasts of the European Commission.

Slackening growth and surging prices for energy, food and other essentials are often cited to explain the downward trend. Add uncertainty and the protracted war in Ukraine and the outlook for trade unions and collective bargaining is challenging—as we argue in the latest European Collective Bargaining Report from the Institute of Economic and Social Research (WSI) of the Hans Böckler Foundation.

Wage-price spiral?

Much media comment foregrounds the danger of an escalating wage-price spiral. According to orthodox economists, the threat of ‘overheating’ wages is just around the corner and needs to be pre-empted. These warnings do not however sit well with the continued subdued growth in nominal wages observed in the real economy.

Nominal wages rose by only 4.2 per cent in 2021 and wage growth is likely to slow to 3.7 per cent in 2022, according to data from the commission. The European Central Bank’s forward-looking euro-area wage tracker points to even lower wage growth, of around 3 per cent this year. This is compatible with price stability, considering long-run trends in labour productivity and the ECB’s inflation target—Philip Lane, a member of the executive board of the ECB, said as much earlier this year.


Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content. We will never send you spam and you can unsubscribe anytime.

Sign up here

Amid the cost-of-living crisis, much less attention has been paid to the many companies reporting high profits and paying out billions of euro in dividends. Workers cannot unilaterally raise the price of their labour, but many companies have done just that with their products.

Take the German car industry, which is doing just fine—despite supply-chain disruptions. Reading through the latest corporate reports of the three leading German manufacturers, ‘improved price positioning’ emerges as a key reason for their last bumper year of profits. For shareholders, this is good news. For the public, it’s inflation in the making.

Across the economy, higher prices at the car dealership and the supermarket check-out add up, as do dividends on shareholders’ brokerage accounts. Disguised by the economic upheaval, the current year could therefore be characterised by substantial income redistribution at the expense of workers. The commission expects that the proportion of economic output allocated to wages—the labour share—will fall in 2022. Conversely, the share of business and property income is forecast to rise. This is all the more remarkable, given that the profit share usually declines during a crisis.

This time is different

This crisis, in other words, is different. Are workers going to pay the economic bill for Vladimir Putin’s war? To counteract this, high wage demands in sectors with good profits are justified. They can also be met by the companies concerned.

This sanguine assessment is supported by key economic data. According to preliminary estimates by Eurostat, gross domestic product in the second quarter of 2022 was 4 per cent higher in the EU than in the same period of the previous year. In its most recent outlook, as of mid-July, the commission continued to forecast GDP growth of 2.7 per cent on average for the year (2.6 per cent for the euro area).

Hypothetically, if the goal were to keep the distribution between capital and labour stable, taking productivity growth and inflation as given, how much would wages need to rise? For the sake of argument, let’s embrace a position often held by employers—that they, too, suffer from rising world market prices for fossil fuels and many other commodities they use as inputs, which up to a point is true. So when defining ‘inflation’ in the WSI report, we did not only use the consumer price index, but also changes in the GDP deflator (which strips out the effect of import prices).

Both labour productivity and the GDP deflator relate to domestic value added, and hence determine the ability of companies to pay higher (nominal) wages. Combining the measures, and using data from the commission’s forecast, we calculated a ‘distribution-neutral margin for wage growth’. This is an estimate of the growth rate for nominal wages that keeps the shares of wages and profits in domestic value added constant—in other words, stabilises the functional income distribution.

The result is striking: in the current year, nominal wages would need to grow by about 6 per cent on average across the EU to keep the wage share unchanged, without eroding the profit share. We are not arguing that wages should grow by 6 per cent across the board but that, from a macroeconomic point of view, relatively high nominal wage increases are possible in some sectors—without leading to a decline in profits.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Sharing the burden

The dominant discourse on inflation largely ignores the distributional impact of the crisis. Yet falling real wages and growing profits cannot be the model for sharing the economic burden of the war in Ukraine. In trying to shift the responsibility for inflation to workers, and in calling on trade unions to exercise wage restraint in the name of an ‘overriding general interest’, many commentators are barking up the wrong tree.

What is largely missing from the debate—and would be more appropriate—is an appeal to companies to practise ‘profit restraint’. Driving up prices, even if euphemistically rephrased as ‘improved price positioning’, should not be seen as proof of managerial excellence.

Collective bargaining does not serve to maximise shareholder value. Neither does it dictate monetary policy. For many years after the global financial crisis, the risk of a deflationary spiral was the chief monetary concern. Stronger wage growth would have helped fend it off, as the ECB kept emphasising. Few employers however took the hint and countenanced higher wage settlements.

Now, unions such as Germany’s IG Metall are sticking to their long-term policy and factoring the ECB’s target inflation rate of 2 per cent (rather than the actual rate) into their wage demands. Still, they face a backlash for purportedly setting off a wage-price spiral.

Collective bargaining serves other, legitimate purposes. Distributional objectives are at the heart of many wage negotiations and they are even more relevant in today’s context. If unions do not look after workers’ interests and place distribution on the agenda, who will?

To be sure, collective bargaining alone cannot solve the cost-of-living crisis. For that, we need a decisive response by European welfare states. But to avoid workers alone paying the bill for Putin’s war, fair wage settlements are needed. Achieving that, of course, is no small task for trade unions across Europe in the current turmoil.

Malte Lübker
Malte Lübker

Malte Lübker is a researcher at the Economic and Social Research Institute (WSI) of the Hans Böckler Stiftung. His main areas of interest are pay, collective bargaining, income distribution (individual and functional) and redistribution through the welfare state.

Thilo Janssen
Thilo Janssen

Thilo Janssen is a researcher at the Economic and Social Research Institute (WSI) of the Hans Böckler Stiftung and a correspondent for the European Foundation for the Improvement of Living and Working Conditions (Eurofound). His main areas of interest are European industrial relations and European integration.

You are here: Home / Economy / Are workers going to pay the bill for Putin’s war?

Most Popular Posts

Visentini,ITUC,Qatar,Fight Impunity,50,000 Visentini, ‘Fight Impunity’, the ITUC and QatarFrank Hoffer
Russian soldiers' mothers,war,Ukraine The Ukraine war and Russian soldiers’ mothersJennifer Mathers and Natasha Danilova
IGU,documents,International Gas Union,lobby,lobbying,sustainable finance taxonomy,green gas,EU,COP ‘Gaslighting’ Europe on fossil fuelsFaye Holder
Schengen,Fortress Europe,Romania,Bulgaria Romania and Bulgaria stuck in EU’s second tierMagdalena Ulceluse
income inequality,inequality,Gini,1 per cent,elephant chart,elephant Global income inequality: time to revise the elephantBranko Milanovic

Most Recent Posts

energy transition,Europe,wind and solar Europe’s energy transition starts to speed upDave Jones
equality bodies,gender equality Setting standards for national equality bodiesEvelyn Collins
Pakistan,flooding,floods Flooded Pakistan, symbol of climate injusticeZareen Zahid Qureshi
reality check,EU foreign policy,Russia Russia’s invasion of Ukraine: a reality check for the EUHeidi Mauer, Richard Whitman and Nicholas Wright
permanent EU investment fund,Recovery and Resilience Facility,public investment,RRF Towards a permanent EU investment fundPhilipp Heimberger and Andreas Lichtenberger

Other Social Europe Publications

front cover scaled Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship
Women Corona e1631700896969 500 Women and the coronavirus crisis
sere12 1 RE No. 12: Why No Economic Democracy in Sweden?

Foundation for European Progressive Studies Advertisement

The winter issue of the Progressive Post magazine from FEPS is out!

The sequence of recent catastrophes has thrust new words into our vocabulary—'polycrisis', for example, even 'permacrisis'. These challenges have multiple origins, reinforce each other and cannot be tackled individually. But could they also be opportunities for the EU?

This issue offers compelling analyses on the European health union, multilateralism and international co-operation, the state of the union, political alternatives to the narrative imposed by the right and much more!


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

The macroeconomic effects of re-applying the EU fiscal rules

Against the background of the European Commission's reform plans for the Stability and Growth Pact (SGP), this policy brief uses the macroeconometric multi-country model NiGEM to simulate the macroeconomic implications of the most relevant reform options from 2024 onwards. Next to a return to the existing and unreformed rules, the most prominent options include an expenditure rule linked to a debt anchor.

Our results for the euro area and its four biggest economies—France, Italy, Germany and Spain—indicate that returning to the rules of the SGP would lead to severe cuts in public spending, particularly if the SGP rules were interpreted as in the past. A more flexible interpretation would only somewhat ease the fiscal-adjustment burden. An expenditure rule along the lines of the European Fiscal Board would, however, not necessarily alleviate that burden in and of itself.

Our simulations show great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way. Raising the debt ceiling to 90 per cent of gross domestic product and applying less demanding fiscal adjustments, as proposed by the IMK, would go a long way.


DOWNLOAD HERE

ILO advertisement

Global Wage Report 2022-23: The impact of inflation and COVID-19 on wages and purchasing power

The International Labour Organization's Global Wage Report is a key reference on wages and wage inequality for the academic community and policy-makers around the world.

This eighth edition of the report, The Impact of inflation and COVID-19 on wages and purchasing power, examines the evolution of real wages, giving a unique picture of wage trends globally and by region. The report includes evidence on how wages have evolved through the COVID-19 crisis as well as how the current inflationary context is biting into real wage growth in most regions of the world. The report shows that for the first time in the 21st century real wage growth has fallen to negative values while, at the same time, the gap between real productivity growth and real wage growth continues to widen.

The report analysis the evolution of the real total wage bill from 2019 to 2022 to show how its different components—employment, nominal wages and inflation—have changed during the COVID-19 crisis and, more recently, during the cost-of-living crisis. The decomposition of the total wage bill, and its evolution, is shown for all wage employees and distinguishes between women and men. The report also looks at changes in wage inequality and the gender pay gap to reveal how COVID-19 may have contributed to increasing income inequality in different regions of the world. Together, the empirical evidence in the report becomes the backbone of a policy discussion that could play a key role in a human-centred recovery from the different ongoing crises.


DOWNLOAD HERE

ETUI advertisement

The EU recovery strategy: a blueprint for a more Social Europe or a house of cards?

This new ETUI paper explores the European Union recovery strategy, with a focus on its potentially transformative aspects vis-à-vis European integration and its implications for the social dimension of the EU’s socio-economic governance. In particular, it reflects on whether the agreed measures provide sufficient safeguards against the spectre of austerity and whether these constitute steps away from treating social and labour policies as mere ‘variables’ of economic growth.


DOWNLOAD HERE

Eurofound advertisement

Eurofound webinar: Making telework work for everyone

Since 2020 more European workers and managers have enjoyed greater flexibility and autonomy in work and are reporting their preference for hybrid working. Also driven by technological developments and structural changes in employment, organisations are now integrating telework more permanently into their workplace.

To reflect on these shifts, on 6 December Eurofound researchers Oscar Vargas and John Hurley explored the challenges and opportunities of the surge in telework, as well as the overall growth of telework and teleworkable jobs in the EU and what this means for workers, managers, companies and policymakers.


WATCH THE WEBINAR HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube