Analysis-Wage catch-up to prolong Europe's inflation battle
By Balazs Koranyi
FRANKFURT (Reuters) - "We've been short-changed for too long," is how many of Europe's top labour unions are framing wage claims this year, promising industrial action if those demands go unheard.
The euro zone's 165 million workers have watched their wages slip behind inflation for a third year running even as companies rake in profits by jacking up prices faster than costs rise.
Now, record-high employment and widespread labour shortages are giving workers rare leverage - and many see an opportunity to recoup some of the spending power lost in past years. While central bankers may sympathise, it also adds to their problems.
"Part of the wage increase is understandable," said Jens Ulbrich, chief economist at Germany's Bundesbank.
"It's a partial catch-up and the share of wages in economic output is not increasing. But these trends point to more persistent inflation and slower disinflation," he said of efforts to bring price growth down from a current 8.5%.
For workers across the 20 countries that share the euro, real compensation per hour has dropped by more than 7% since the start of 2021. That, combined with the fact that employment is at a record high - 3.6 million above the pre-pandemic peak - gives them solid grounds on which to push for rises.
Yet the rapid wage growth underway now will hamper the European Central Bank's efforts to get inflation back to its 2% target, and possibly force it to keep interest rates high for longer.
Trade union demands for compensation for the impact of past inflation cause particular concern for monetary policymakers because so-called backward-looking wage-setting tends to embed higher inflation in the longer term.
Amsterdam's Schiphol Airport, which saw thousands of cancelled flights and 4-5 hour wait times last summer, may be a case study in how workers are leveraging their power.
FNV, the largest trade union in the Netherlands, last week secured an 8% pay increase for this year at Schiphol plus a 2,000 euro one-off payment, along with a raft of other benefits.
"High (corporate) profits are largely paid for by consumers facing rising prices," FNV's José Kager said. "Everything is getting more expensive, but wages are lagging. Wages have been lagging behind for a long while so it's high time for working people to get their share."
"We are taking a first step, but much more is needed to reverse the years of lopsided wage growth," Kager added.
The deal comes as Schiphol is still being forced to curtail traffic below 2019 levels because of labour shortages.
(Graphic: Labor shortages acute in the euro zone, https://fingfx.thomsonreuters.com/gfx/mkt/lbvggleldvq/Pasted%20image%201678373659531.png)
In Germany, more than half of companies are struggling to fill vacancies, the highest level on record, despite a recession in Europe's biggest economy, the German Chambers of Commerce and Industry says.
This is shifting power to workers and strikes are becoming more widespread.
United Services Union ver.di is asking for a 10.5% pay increase for around 2.5 million federal and local government employees. Workers from airports to public transport have already held warning strikes in response to pay offers worth just a fraction of their demands.
"The inflation trend, food and especially energy prices are tearing deep holes in our workers' budgets," ver.di Chairman Frank Werneke said. "Many of them don't know how they can keep themselves and their families afloat, and some can no longer pay their rents or heating costs."
Ver.di has already warned that if pay deals fail, Germany will face "another chaotic summer," a reference to last year's debilitating bottlenecks in the services sector.
On Thursday, meanwhile, workers at German mail and parcel firm Deutsche Post, parent of DHL, overwhelmingly backed an indefinite strike in a vote because their demands for a 15% pay increase have not been met.
Labour markets are not as tight in southern Europe but even there, movement is apparent. In Spain, the percentage of workers covered by collective agreements with indexation clauses has almost doubled over the last two years to over 27%.
(Graphic: Euro zone real wages fall, https://fingfx.thomsonreuters.com/gfx/mkt/byvrlqwqnve/Pasted%20image%201678373410332.png)
While the much-feared "wage-price-spiral" is not underway as inflation is still slowing, price growth is set to be more persistent.
This "stickiness" is why markets have swiftly increased their rate hike bets over the past month. Investors now see the peak rate above 4%, up another 1.5 percentage points, suggesting rate hikes through the summer.
Philip Lane, the ECB's chief economist, says the wage-adjustment process could put upward pressure on inflation for the next two or three years, but expects a return to normal beyond that.
"The high levels of wage growth projected for 2023 and 2024 can be expected to make wages an increasingly dominant driver of underlying inflation in the euro area," Lane says.
Commerzbank economist Joerg Kraemer takes a less benign view, arguing that more expensive labour will offset the drop in materials costs, pointing to stubbornly high core inflation and further ECB interest rate increases.
"Labour is likely to remain unusually scarce, especially in the core euro area countries, also for demographic reasons, unless there is a deep recession," Kraemer said. "The bargaining position for unions and employees should remain strong."
(Additional reporting by Anthony Deutsch, Chris Steitz, Klaus Lauer, Belen Carreno and Leigh Thomas; Editing by Mark John and Catherine Evans)