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

Europe Does Not Understand Deflation And Wages

Ronald Janssen 15th July 2014

Ronald Janssen

Ronald Janssen

Led by the IMF, the main body of mainstream economists is now aware of the danger that debt deflation is raising for several Euro Area member states. This awareness is surely a good thing.

However, what is conspicuously absent in this discussion is the link with wages. It is as if ‘lowflation’ (as the IMF is calling it) is coming out of the blue. There is hardly, if any, recognition of the fact that too low inflation is directly caused by the strategy of internal wage devaluation that policy has been pursuing over recent years in the Euro Area.

Given this tendency to ignore the link between wage cuts and falling inflation, it does not come as a surprise that recent statistics published by Eurostat on the evolution of hourly labour costs have hardly been noticed.

Indeed, in the first quarter of 2014, the Euro area’s labour cost index, which is a measure of hourly wage costs, has barely gone up. From the graph below the continuing trend of weakening of wage dynamics can clearly be noticed. And again, why should it come as a big surprise that inflation is as low as 0.5% if hourly wages dynamics have come down to just 0,9%?

p1


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

Moreover, splitting this Euro Area average out over the different member states shows that this weakening of wage trends is a widespread phenomenon. Hourly wage costs are falling in Ireland, Greece, Cyprus, Italy, and Croatia. They are barely increasing in Spain, Belgium and the Netherlands. Even in Germany, where the crisis is hardly being felt, first quarter wage dynamics are also down, just reaching 1.1%.

p2

Of course, quarterly figures can be volatile and should not be taken as conclusive evidence on their own. The trend however is worrying and, together with other indicators such as falling producer prices, this is another sign on the wall that the threat of debt deflation is all too real in the Euro Area.

Money As A Veil?

The mainstream does not only fail to comprehend wage deregulation as a cause for debt deflation, it also refuses to recognise that the opposite is also true and that restoring wage formation systems so as to prevent wages from falling through the floor is key to getting back to price stability.

Instead, it seems that they are placing their hopes on monetary policy, with many calling upon the ECB to go beyond the recently decided measures such as negative interest rates and new repurchase operations. They call for massive quantitative easing. Not a single economist however (to my knowledge at least) is raising the question whether printing masses of money will really get us further away from deflation if at the same time wages are falling through the floor.

It is as if all of them have become monetarists, believing that inflation is purely a monetary phenomenon which has nothing to do with the real economy so that a central bank simply has to push the money printing press in order to get the inflation it wants. Empirically however, this is not correct as has been vividly shown by the experience of the last years when central banks have injected loads of money into the banking sector without this liquidity being transformed into credits for investment and consumption.

The drama that is unfolding at this moment is that European politics, after the electoral backlash delivered to mainstream parties, seems to be dead set on exchanging one erroneous policy (austerity) with another one (deflationary structural reforms). Politicians, irrespective whether they are centre-right or centre-left, still have not grasped the fact that if they continue to undermine wages and collective bargaining systems they will only make things worse. Low inflation will get even lower and more member states will sink into outright deflation and get caught in the depressionary trap of rising real debt burdens.

Since the economic mainstream in Europe is, once again, failing to provide correct economic policy advice, European politicians would do well to look for inspiration in Japan. There, big business, the Japanese trade unions and government jointly called on companies to negotiate big pay rises so as to end two decades of deflation. In Japan with “Abenomics”, there is at least the intellectual understanding that wages have an important role to play as an anchor for stability, an understanding that is unfortunately still missing in Europe.


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

Ronald Janssen

Ronald Janssen is working as economic policy adviser at the Trade Union Advisory Committee to the OECD (TUAC).

You are here: Home / Politics / Europe Does Not Understand Deflation And Wages

Most Popular Posts

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
Orbán,Hungary,Russia,Putin,sanctions,European Union,EU,European Parliament,commission,funds,funding Time to confront Europe’s rogue state—HungaryStephen Pogány

Most Recent Posts

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
sustainability,SDGs,Finland Embedding sustainability in a government programmeJohanna Juselius
social dialogue,social partners Social dialogue must be at the heart of Europe’s futureClaes-Mikael Ståhl
Jacinda Ardern,women,leadership,New Zealand What it means when Jacinda Ardern calls timePeter Davis

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?

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

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

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