Low wage growth in the euro area: main conclusions from the ESCB Wage Expert Group with a focus on Belgium
After the “low inflation puzzle”, reflecting the unexpectedly low inflation rates that have persisted in spite of the recovery of economic activity, the “low wage growth puzzle” has also emerged in the euro area. Despite the labour market picking up since 2013, wage growth has remained particularly weak. With this puzzle in mind, the European system of central banks set up a working group, called the Wage Expert Group (WEG), to try and identify the factors behind it. The article highlights the working group’s main findings and focuses on the Belgian situation in particular, where the same finding holds.
The wage formation process in Belgium is strictly framed by the Law on the Promotion of Employment and the Preventive Safeguarding of Competitiveness, hence the economic cycle plays more of an indirect role in wage formation. Real wage increases are determined every two years by the social partners in the interprofessional agreement, taking account of the forecasts in wage costs in the neighbouring countries. In addition, Belgian wages are systematically adjusted to inflation, via the health index. During the period under study wage moderation policies were imposed by the federal government in a bid to strengthen Belgium’s competitive edge. On top of that, the low inflation in 2014 and 2015 led to subdued wage growth, despite an improving labour market. This second factor can also explain a large part of the low wage growth for the euro area.
But low inflation and wage moderation measures do not explain everything. This raises the question whether there are some more structural factors behind this.
The fact that employment of low-skilled workers and young people is more sensitive to macroeconomic fluctuations in activity is equally well documented, so an economic slowdown can actually lead to higher average wages. The empirical work of the WEG has confirmed the existence of these composition effects. At the beginning of the great economic and financial crisis, there was evidence of positive composition effects in aggregate wages that tapered off after that and have disappeared or even turned negative. In this sense, composition effects have therefore also contributed to the observed weakness of wages, even though their role is still only marginal.
Apart from the influence of composition effects, there are other factors at play. The Phillips curve – that illustrates a negative empirical relationship between the unemployment rate and the inflation or nominal wage growth – would be asymmetric in the economic cycle, with the curve slope becoming less steep in periods when a lot of economic capacity is unused. Moreover, the trend factors in wage determination would have exerted downward pressure too: the decline in trend inflation and in trend productivity have also contributed to the sluggishness of wages over the recent period.
Although the Phillips curve is still one of the most useful theoretical frameworks for understanding the link between cyclical movements in nominal wage costs and macroeconomic conditions, the WEG findings also point up the considerable heterogeneity between the different euro area countries. The Phillips curve works better for the euro area as a whole than for countries considered individually. Country-specific factors have also played a role: in Germany, economic migration may have had a moderating effect on wage growth, while in Belgium, it is mainly a question of the various wage moderation measures taken in a bid to restore our economy’s cost competitiveness.