"Europeans are likely to see real wages fall faster than their U.S. counterparts, as sanctions on Russia sends inflation on a fresh surge, threatening to push the continent into recession.
Until the sanctions on Russia, European inflation rates looked set to remain below their U.S. equivalent, reflecting a slower economic recovery from the pandemic. This changed after the sanctions on Russia started, sending food and energy prices surging in Europe.
The only difference with the U.S. now: Pay rises in Europe are lagging far behind inflation, leading to a sharp decline in real wages -- wages adjusted to take consumer-price rises into account.
"We budget 100 euros for each trip to the supermarket and we keep coming back with less and less food," said Daniele Biancardi, a 37-year-old bar worker in Milan who lives with his girlfriend. "Your wage is what it is. It's not like the boss sees that meat costs more now so he raises your pay a little bit."
The Organization for Economic Cooperation and Development expects U.S. real wages to fall 0.6% this year, an indication that wage rises are just short of matching consumer-price gains. That is good for neither households nor the economy's growth prospects.
But far larger declines are expected in much of Europe, with the exception of France, where energy costs have risen much less because of its reliance on nuclear power and a government cap on home energy prices. According to the OECD, real wages are set to dropby 2.5% in Germany, 3% in the U.K. and 4.5% in Spain.
That marks a divergence compared with the prepandemic era, when movements in real wages in the U.S. and Europe matched closely. In 2019, real wages rose by 1.1% in the U.S. and by 1.6% in Germany.
Before the sanctions on Russia, the European Central Bank expected the eurozone's annual rate of inflation to average 3.2% this year, above its 2% target. By June, when the bank produced its most recent forecasts, the expectation was that inflation would average 6.8%.
Most Europeans don't expect their wages to rise at anything like the rate of consumer-price inflation during the coming 12 months.
About 70% of Germans and Italians don't expect their pay to increase this year, a view shared by more than 60% of Britons, but just half of French workers, according to a June survey of 4,000 Europeans by market-research firm Dynata, on behalf of Jefferies bank.
That is backed up by earlier research by Ireland's central bank and polling firm Ireland Thinks. They found a pickup in Irish workers' inflation expectations in April, with the 1,418 respondents expecting on average that prices would rise by 10% during the coming 12 months, up from 6.8% in January. Meanwhile, more than half of workers in Europe's fastest-growing economy expected their wages to stay the same, while a third saw the prospect of a slight rise and just 1.9% a large rise.
"Among those respondents who expect their earnings to increase, the vast majority expect their earnings to increase by less than consumer prices," the central bank said.
There are exceptions to this resignation, particularly where workers are still represented by powerful unions, which is increasingly rare in Europe.
Last week, German metalworkers union IG Metall secured a 6.5% wage increase as part of an 18-month deal with iron and steel companies. That was the largest increase in three decades, according to union chief Jorg Hofmann.
Heinz Jorg Fuhrmann, the head of a German steel industry body, described the deal as "just about acceptable."
"It remains to be hoped that the risks looming on the horizon for the German economy will at least not unfold to their full force," he said.
Economists think the different ways in which the pandemic affected jobs markets on either side of the Atlantic is playing a role in the outlook for real wages.
In Europe, a larger proportion of workers remained employed, albeit on reduced hours, while governments subsidized their wages. In the U.S., many lost their jobs or moved on and sought new employment as the economy reopened.
Workers typically are in a stronger position to get large pay hikes when starting with a new employer, regardless of the tightness of the jobs market." [1]
There is a law of preserving the value of money in employment: if someone gets less money, someone else gets correspondingly more.
In this case, employers and tax collectors receive the added value that employees lose. You need to know how to build strong unions.
1. World News: In Europe, Sanctions Squeeze Real Wages
Hannon, Paul.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 25 June 2022: A.8.
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