Slow wage growth despite falling unemployment is one of the key missing pieces in the inflation puzzle the ECB faces as it prepares to scale back its stimulus. For Governing Council member Ewald Nowotny, that means dropping central-bank restraint and calling for higher salaries.
“We’ve come to a situation in which central banks are supporting bigger wage increases to achieve adequate inflation”
As Nowotny noted in his interview with Der Standard on Thursday, the ECB isn’t alone in facing weak price pressures.
Despite unemployment back at pre-crisis levels, U.S. wages are only growing at what Federal Reserve Chair Janet Yellen has called a “moderate” pace. She partly blames slow productivity growth, as does the International Monetary Fund. U.K. wages are lagging well behind inflation -- possibly as employers hold back because of uncertainties over Brexit -- even with the jobless rate at a 42-year low.
At the ECB, which will meet on Oct. 26 to discuss its stimulus strategy for 2018, President Mario Draghi has said salaries are the “linchpin” of a self-sustained increase in inflation and pay is the “key variable that we should look at.”
Euro-area unemployment is down to 9.1 percent from a record 12.1 percent. While that’s more than twice as high as in the U.S. or U.K., the bloc’s relatively rigid labor markets mean it’s probably close to the level at which pay pressures should pick up, according to the economic model known as the Phillips Curve.
Yet negotiated wages rose an average 1.4 percent year-on-year in the second quarter of 2017, compared with 2 percent at the beginning of 2013.
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Researchers at the Frankfurt-based ECB say one possible explanation is that joblessness is higher than it appears: a broader measure including those who work less than they want may be almost double the official rate. Pension reforms, which are pushing older people to work longer, might also be a factor.
In Germany, which has record-low unemployment, the Bundesbank warned in August that the outcome of pending wage talks for service-sector employees would likely be muted because of the impact of digitization and more flexible working hours.
Another reason why unions might not be doing what Nowotny wants is that workers are seeking benefits in lieu of higher pay. Germany’s 2.3-million member IG Metall has asked for the option to work just 28 hours a week. It also wants a 6 percent pay rise, though in past rounds has obtained about half of what it requested.
Even so, the prevailing view at the ECB is that lower unemployment will eventually translate in higher pay, just more slowly than in the pre-crisis era, as Executive Board member Peter Praet claimed in July.
“The Phillips curve is not broken, but it is flatter and the process is slower.”
Bloomberg Intelligence sees nascent signs that Praet may be right, with an ECB measure of compensation per employee, which tries to avoid too-heavy a focus on collective-bargaining agreements, on the rise.
“It does take time for stronger economic growth to translate into rising employment and then for higher wages to follow,” BI economists Maxime Sbaihi and Jamie Murray say. “The ECB will be pleased by visible signs, albeit timid, that domestically generated inflation and wages might be turning a corner at last.”
So the question arises of whether central-bank heads should be quite as explicit as Nowotny. He defended his intervention by saying there was a time when things were the other way around.
“Central banks have always commented on pay developments, until now with warnings against too-high wage agreements. Now things have changed.”