Analysis – Wage catch-up will prolong Europe’s inflation war

Baraz Colany

FRANKFURT (Reuters) – Many of Europe’s top trade unions have framed wage claims this year and have pledged to take industrial action if these demands are not heeded, saying: “We are too We have been mistreated for a long time,” he said.

Eurozone’s 165 million workers see wages lag inflation for the third year in a row, even as firms raise prices faster than costs increase profits I’m witnessing the

With record employment and widespread labor shortages now giving workers rare leverage, many see an opportunity to regain some of the purchasing power they lost in the past few years. . Central bankers may sympathize, but they make matters worse.

“Some of the wage increases are understandable,” said Jens Ulbrich, chief economist at the German Bundesbank.

“It’s a partial catch-up, and wages’ share of economic output hasn’t increased. But these trends point to more sustained inflation and moderate disinflation.

Hourly real earnings for workers in 20 euro-sharing countries have fallen by more than 7% since early 2021. On top of this, employment is at a record high, putting him 3.6 million above the pre-pandemic peak. – Give them a solid basis to push upwards.

However, ongoing rapid wage increases could hamper the European Central Bank’s efforts to return inflation to its 2% target, forcing interest rates to remain high for longer.

Trade union demands for compensation for the effects of past inflation raise particular concerns for monetary policymakers.

Amsterdam’s Schiphol Airport, where thousands of flights were canceled last summer resulting in 4-5 hour wait times, could be a case study of how employees are using their power. there is.

The FNV, the Netherlands’ largest trade union, secured in Schiphol last week an 8% salary increase for this year, plus a lump sum of €2,000 and many other benefits.

“High profits (of companies) are mainly being funded by consumers facing rising prices,” said FNV’s José Kager. “Everything is getting more expensive, but wages are lagging behind. Wages have lagging behind for a long time, so it’s time for working people to get their share.”

“We are taking the first steps, but much more is needed to reverse years of lopsided wage growth,” Kager added.

The deal comes at a time when Schiphol is forced to cut traffic below 2019 levels due to labor shortages.

(Graphic: Labor shortage in the Eurozone, https://fingfx.thomsonreuters.com/gfx/mkt/lbvggleldvq/Pasted%20image%201678373659531.png)

strike?

In Germany, more than half of companies are struggling to fill vacancies, a record level, despite the recession in Europe’s biggest economy, according to the German Chamber of Commerce.

This is transferring power to the workers and strikes are becoming more widespread.

The United Services Union ver.di calls for a 10.5% wage increase for approximately 2.5 million federal and local government employees. Workers from airports to public transport have already gone on warning strikes in response to wage offers amounting to a fraction of their demands.

Frank Werneke, president of ver.di, said: “Many of them don’t know how to support themselves and their families, and some are unable to pay their rent or utility bills.”

Ver.di has already warned Germany could face “another chaotic summer” if wage negotiations fell through, a reference to weakening bottlenecks in the services sector last year. be.

Meanwhile, on Thursday, workers at DHL’s parent company, German postal and parcel company Deutsche Post (OTC:), voted overwhelmingly to strike indefinitely because their demands for a 15% wage increase have not been met. supported by

Labor markets are less tight in Southern Europe, but the move is clear nonetheless. In Spain, the proportion of workers covered by collective bargaining agreements with index clauses has nearly doubled over the past two years to over 27%.

(Graphic: Eurozone Real Wages Falling, https://fingfx.thomsonreuters.com/gfx/mkt/byvrlqwqnve/Pasted%20image%201678373410332.png)

protracted inflation

The much-feared ‘wage-price spiral’ has not progressed as inflation is still slowing, but inflation is set to be more sustained.

This “stickiness” is why the market has rapidly increased bets on rate hikes over the past month. Investors now have peak interest rates above his 4% and he’s up 1.5%, suggesting interest rates will rise over the summer.

ECB chief economist Philippe Lane says the wage adjustment process could put upward pressure on inflation over the next two to three years, but expects a return to normal after that. .

“With the high level of wage growth projected for 2023 and 2024, we expect wages to become an increasingly dominant driver of underlying inflation in the euro area,” Lane said.

Commerzbank (ETR:) economist Joerg Kraemer is less favorable, arguing higher labor force will offset lower material costs and pointing to stubbornly high core inflation and further ECB rate hikes. don’t look.

“Barring a severe recession, labor is likely to continue to be abnormally scarce for demographic reasons, especially in core eurozone countries,” Kramer said. “The bargaining position between unions and employees should remain strong.”