By Paul Hannon and Nina Adam
European Central Bank officials are watching wage growth as they
plot a gradual retreat from the easy money policies they've
employed in recent years to boost the regional economy. But the
pickup they're looking for as a signal that Europe is returning to
full health might not materialize.
Last month, ECB economists cut their 2017 forecast for regional
wage growth to 1.5% from 1.7%, after a paltry 1.2% increase in
2016. Germany is enjoying gains, but its neighbors lag far behind,
including wage growth of less than 1% in Spain and Italy.
Hidden economic slack and long-run trends could stymie wages
across the whole region in the months ahead.
Workers face competition from lower-cost economies and
technological innovations threaten to replace workers with robots.
That's holding down wages across a range of developed economies,
including the U.S. This is exacerbated in Europe by the shifting
nature of wage-bargaining and a focus at labor unions on winning
more flexible work hours and job security rather than pay
raises.
Eurozone policy makers have promoted a push away from collective
wage bargaining. In the name of better worker productivity, they
want to nudge the eurozone closer to the model common in the U.S.
and the U.K., where pay is set at the level of the company or the
individual, rather than across whole sectors.
The process began in Germany, which was mocked as the 'sick man
of Europe' in the early 2000s. The country embarked on a series of
labor market overhauls, which facilitated an expansion in temporary
work and reduced labor union coverage.
It has since spread through Spain, Italy and -- more recently --
France, where President Emmanuel Macron has put an ambitious labor
overhaul at the center of his political agenda. It could pay off in
the form of lower unemployment and greater productivity in the long
run. In the short run, however, the push has made workers reluctant
to demand big pay raises.
German workers are reaping some of the benefits of change now,
in part because unemployment, at 3.6% of the labor force, is so
low. German wages were 2.9% higher in the second quarter from a
year earlier. Still, even in Germany that's less than the 3.5%
gains seen in the 1980s and 1990s.
Official data show many of the new jobs created in the eurozone
are part-time, leaving many people working fewer hours than they
would like, and thus less bargaining power. Even in Germany, about
5.4 million people still want a job or wish to work longer hours,
Germany's statistics body says.
Slack in the labor market is especially large in Southern
Europe, according to the Organization for Economic Cooperation and
Development. In Spain, the rate of labor underutilization is close
to 30%. In Italy, it is 27%, compared with 9% in the U.S. In
addition to those who are unemployed, the underutilization rate
includes those who want to work but haven't recently looked for a
job, and those who are working fewer hours than they would
like.
Moreover, many eurozone workers are on temporary contracts that
economists say typically attract lower pay and smaller pay rises
than full-time alternatives.
According to calculations by Marchel Alexandrovich, an economist
at Jefferies International, more than half of the 1.5 million new
jobs created in Spain since the start of 2014 are temporary. The
proportion is even greater in Italy, he said, where a total of
592,000 new jobs were created over the same period.
"In a best-case scenario, these jobs will end up being converted
into permanent employment," Mr. Alexandrovich said. "It's also
possible that they may not, which means that for any given level of
employment, job insecurity is higher."
Apart from Germany's hypercompetitive export industries, many of
the new jobs created in recent years are in low-productivity
sectors that tend not to produce much wage growth, such as elderly
care and helping to integrate recently arrived migrants. For people
who work for Germany's government, pay rises are constrained by its
insistence on balancing its budget to prepare for higher pension
and health care costs in the future.
An early indication of the wage outlook comes Thursday -- the
same day the ECB is expected to announce it will scale back its
bond-purchase programs -- when Germany's powerful IG Metall labor
union is due to deliver its final pay claim for 2018.
The labor union, Europe's largest by membership, is seeking a
pay rise of 6% for a period of 12 months for the roughly 3.9
million workers in the metals and electrical industries, which, if
successful, would mark the largest increase since 1991. But in past
rounds, Germany's metals workers have settled for about half of
what they demanded.
This time, IG Metall has other priorities, which are likely to
limit the agreed rise in wages. That includes safeguarding jobs
against threats from globalization and technological change. It
also includes a demand that workers should be able to temporarily
reduce their labor time to 28 hours a week for up to two years.
"We want a work schedule that suits workers' way of life," said
Jörg Hofmann, who heads the IG Metall union.
That isn't a recipe for a big pay rise.
Write to Paul Hannon at paul.hannon@wsj.com and Nina Adam at
nina.adam@wsj.com
(END) Dow Jones Newswires
October 22, 2017 12:14 ET (16:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.