ECB Economic Bulletin: Wage Drift Pressure Easing, but Wage Indicators Still High

25 September 2024

By Isabel Teles – FRANKFURT (Econostream) – The support for wage growth from wage drift is weakening, a factor behind the the recent moderation in euro area wage growth indicators, according to a section of the Economic Bulletin prereleased by the European Central Bank on Wednesday.

‘While the euro area is still experiencing historically high levels of growth in compensation per employee, we are now at a point in the disinflation process where the upward pressure coming from wage drift is easing’, the authors of the bulletin said.

Wage drift could help explain the differences between growth in compensation per employee and growth in negotiated wages, they said. 

‘The long-term average also incorporates periods of low wage growth, and so should not be taken to indicate a target’, the authors observed. ‘Accordingly, the growth rates also remain above the wage growth consistent with the 2% inflation target and 1% productivity growth. This primarily reflects the strong impact of compensation for past high inflation and corresponding real wage catch-up.’

Compensation per employee moderated more than expected in 2Q24, the bulletin said, adding that compensation per hour worked was also easing.

Economic conditions were more rapidly reflected in wage drift than in negotiated wage growth, the authors said.

‘Growth in compensation per employee can be divided broadly into negotiated wage growth and wage drift, with the latter leading the former through the economic cycle’, the authors said.

Looking ahead, negotiated wage growth would be the main driver of compensation per employee growth, which would ‘reflect inflation compensation motivations and labour market tightness’, the bulletin said.