February 6, 2023

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The European Central Bank expects “very strong wage growth” in the coming quarters | Abroad

The European Central Bank (ECB) expects wages in the eurozone to rise “very strongly” in the coming quarters. Wage growth is an important indicator of where inflation is headed and reinforces the case for price increases in the Eurozone.

A study of wage developments since the start of the pandemic showed that underlying wage growth has been “relatively weak” and is currently close to its long-term trend, according to the European Central Bank. But in the coming quarters, wage growth will be very strong compared to historical patterns, the European Central Bank wrote in an article that appears in the Economic Bulletin.

Wage growth, according to the ECB, reflects a “strong labor market” that has so far been little affected by the economic slowdown. Increases in the minimum wage in the eurozone and wage increases to offset high inflation also contribute to strong wage growth. According to the European Central Bank, there are signs of strong wage growth, especially in service sectors that suffer from a significant shortage of labour.

an increase of 11 percent

In Belgium, there is a system of automatic wage indexation, linked to inflation. As a result, this month alone, around one million Belgian employees will see their wages increase by around 11 percent in one fell swoop. In other European countries this automatic adjustment does not exist, but wages are raised only as a result of social negotiation or after social protest.

Inflation in the eurozone rose to more than 10 per cent last year. Meanwhile, inflation appears to have peaked due to lower energy prices, but so-called core inflation, which excludes the volatile prices of food and energy, is still at a record high. Moreover, projections assume that inflation will exceed 2% until the end of 2025.

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inflation

The European Central Bank already implemented an unprecedented series of interest rate increases last year to curb inflation. At the last meeting in December, European Central Bank President Christine Lagarde already indicated that interest rates would be raised again by half a percentage point in February. Further increases may be planned after February, according to Lagarde, to prevent a so-called wage price spiral, in which higher wages lead to higher prices, which in turn leads to higher demand for wages.

Weak economic growth won’t help much in the short term, especially since a skilled labor shortage encourages companies to keep and pay well-paid workers. In the long term, the expected economic slowdown and uncertain outlook are likely to affect wage growth.