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

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

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.

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.

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 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 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), focused on European industrial relations and integration.