Economy

ECB Observes Additional Indicators of Relaxed Wage Pressures, According to Reuters

Wage Pressures Easing in Euro Zone, ECB Reports

FRANKFURT – Wage pressures in the euro zone are beginning to relax, largely due to a reduction in additional compensation over and above negotiated wages. This trend is likely to help further moderate inflation, according to a report released by the European Central Bank (ECB) on Wednesday.

For years, wage growth has been rapid, significantly influenced by what is known as "wage drift"—the extra payments made to employees beyond their negotiated salaries. Factors contributing to wage drift include bonuses, compensation for inflation, and increased hours worked. However, recent data indicates that the gap between negotiated wages and actual payments is narrowing, suggesting that inflation pressures may be diminishing, as the ECB has long anticipated.

The ECB stated in an Economic Bulletin article, "We are now at a point in the disinflation process where the upward pressure from wage drift is easing. The recent moderation in compensation per employee growth reflects a decrease in wage drift."

Going forward, negotiated wage growth will become the primary focus for the ECB, although signs of moderation are becoming evident in this area as well. In the second quarter, negotiated wage growth slowed to 3.5%, down from 4.8% in the previous quarter, marking the lowest rate since late 2022.

While this pace still exceeds the 3% growth rate aligned with the ECB’s 2% inflation target, the central bank is optimistic that a continued slowdown will allow price growth to return to its target by late 2025. Nonetheless, Germany, the largest economy in the euro zone, is anticipating significant wage increases extending into 2025, which raises some questions regarding the ECB’s forecasts.

The ECB noted, "As inflation compensation becomes increasingly integrated into collective wage agreements, elevated negotiated wage growth has been maintaining current compensation growth levels." However, the bank also mentioned that while there might be some residual real wage catch-up following the inflation surge, the upward pressure on negotiated wage growth is expected to decline in the near future.

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