Real wage catch-up within the euro space

Prepared by Colm Bates, Katalin Bodnár, Vasco Botelho and Flavie Rousseau

Published as a part of the ECB Economic Bulletin, Issue 5/2025.

Real wages in the euro area have largely recovered from their decline during the period of high inflation in 2022. Nominal wages have recently risen faster than prices. As a result, real wages, which are measured by deflating nominal wages by cost-of-living indicators, are now approaching levels seen before the inflation surge. For example, in the first quarter of 2025, compensation per employee deflated by the Harmonised Index of Consumer Prices (HICP) was only around 0.5% below its level in the fourth quarter of 2021 – at the start of the inflation surge – while in the fourth quarter of 2022 it had dropped 5% below that level (Chart A, panel a). Other wage indicators deflated by the HICP or the private consumption deflator show similar catch-up trends. The recent gradual restoration of lost purchasing power should limit wage demands in the future. However, workers may still perceive a loss in living standards. For instance, they would have continued to perceive a considerable real wage gap in the first quarter of 2025 if they had compared their nominal wages with the prices of frequent out-of-pocket purchases (FROOPP) augmented with HICP energy prices rather than with the overall HICP.^[1]

The nature of inflationary pressures in recent times has pushed a wedge between “real consumer wages” and “real producer wages”. For staff, wages are an revenue issue that contributes to their wellbeing. For employers, nonetheless, wages characterize a price issue that’s historically intently linked to developments in labour productiveness.^[2] From their perspective, the related actual wage measure is calculated relative to the costs that they will cost to provide their items and providers, that are accounted for by the GDP deflator, complete provide deflator or sectoral value-added deflators.^[3] When outlined on this approach, actual producer wages have already surpassed their ranges previous to the inflation surge (Chart A, panel b).^[4] The variations in how actual client and producer wages have developed largely replicate the truth that increased power costs and provide chain disruptions pushed up import costs, resulting in a deterioration within the phrases of commerce.^[5]

At the sectoral degree, actual wages have surpassed their ranges previous to the inflation surge in market providers, however nonetheless have some floor to make up in each the business and development sector and the general public providers sector (Chart B, panel a). Inflation impacts all staff in comparable methods, no matter their jobs. Nominal wages haven’t elevated by the identical quantity or on the similar tempo in all sectors. In the primary quarter of 2025 the true wage catch-up available in the market providers sector was full, whereas actual client wages have been nonetheless lagging in each the business and development sector and the general public providers sector. Real producer wages present the extent to which wage prices elevated relative to the costs charged by corporations in every sector. Employers in market providers have been much less affected by the power shock and benefited probably the most from reopening results following the COVID-19 pandemic, experiencing increased labour shortages because of this, which supported wage progress total. Real producer wages additionally elevated in public providers, with wages weighing extra on the sector’s prices than prior to now. By distinction, employers within the business and development sector – a capital-intensive sector that’s extra uncovered to increased power prices – bore the brunt of the inflation shock. As a outcome, whereas actual client wages in business and development have displayed comparable dynamics to these in public providers, actual producer wages are nonetheless far under the degrees recorded within the fourth quarter of 2021.

Real client wages have absolutely returned to and even exceeded their ranges previous to the inflation surge in a number of euro space international locations, whereas they proceed to lag in others (Chart B, panel b). This displays a mix of things: (i) structural points, which have translated right into a sample of actual wage losses in some international locations over an extended time interval; (ii) a excessive diploma of variation in inflation charges through the high-inflation interval; and (iii) variations within the velocity and construction of wage-setting and the related negotiations throughout international locations.^[6]

Survey proof exhibits that buyers proceed to have combined perceptions of actual wage catch-up, regardless of some enhancements. Real wage developments based mostly on mixture macroeconomic indicators could not absolutely replicate customers’ perceptions of their actual wages. In the second quarter of 2024, annual compensation per worker progress exceeded customers’ inflation perceptions, as recorded within the ECB Consumer Expectations Survey (CES), for the primary time because the 2022 inflation surge (Chart C). Some moderation however, there was nonetheless a constructive hole within the first quarter of 2025. Consumers’ perceptions of actual wage catch-up have implications for his or her confidence and consumption selections. Baumann et al. (2025) discover that a big proportion of customers understand that their nominal wage progress has not exceeded value progress within the earlier 12 months, based mostly on the CES. In April 2025 the CES repeated the identical set of questions concerning actual wage catch-up, and the outcomes remained unchanged: a nonetheless important proportion of customers felt that their wage progress had not outstripped value progress.^[7] This suggests that buyers are inclined to deal with different consumption baskets and that sharp value modifications could proceed to be mirrored of their perceptions over an extended interval. A sustained catch-up of actual wages along with value stability is due to this fact prone to promote client confidence and underscore progress within the euro space. The proof introduced on this field confirms that, total, the selection of value index issues when assessing actual wage catch-up. As highlighted, there’s a distinction between client costs and the costs charged by home corporations. But even when the outcomes focus extra narrowly on the buying energy of customers, completely different consumption baskets nonetheless have important implications for customers’ perceptions of their actual wages.

References

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