Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Wage Growth Is Proving Stubborn
Transcript
- Lucas: If walking through the economy with us has made something click, you might have noticed a tension in the data lately. Inflation is down from its peak, but wage growth is not cooperating. The ECB's latest wage tracker, released last week, shows negotiated wages in the Eurozone rose 4.5 percent in the first quarter of 2026, down only slightly from 4.7 percent in the prior quarter. That is still well above what the ECB considers consistent with its 2 percent inflation target. Luna: And this is the number that’s really worrying policymakers, right? Because if wages keep rising at that pace, services inflation — which is heavily labor-driven — stays sticky. Lucas: Exactly. And the ECB has been very clear: they need to see wage growth moderate to around 3 percent to be confident inflation will settle at target. So the fact that it's still above 4 percent is a problem. Especially because the labor market is actually cooling — unemployment has ticked up to 6.5 percent from its low of 6.3 percent, and job vacancy rates are declining. Normally, you'd see wages follow suit, but that's not happening. Luna: So what's going on? Is this just a lag effect — wages always catch up late — or is something structural changing? Lucas: It's partly a catch-up story. During the 2021-2023 inflation surge, real wages fell sharply — workers lost purchasing power. Now unions are demanding big increases to make up for that loss. In Germany, for example, the metal and electrical industries just settled a deal worth around 5.2 percent over 12 months. That's a big chunk of the workforce. And in Spain, the government raised the minimum wage by another 5 percent in January. Luna: So those one-off catch-up effects are still washing through the system. But the ECB has warned that if they become entrenched, it could trigger a wage-price spiral. Lucas: Right. And that's the risk. The German IFO survey from May shows that more firms expect wage increases in the next three months than those that don't — especially in services like hospitality, healthcare, and construction. And those sectors are also reporting that they plan to pass those costs on to prices. So the feedback loop is not broken yet. Luna: There's also the minimum wage effect. A lot of countries in the Eurozone have been raising statutory minimums quite aggressively — Germany, Spain, even Italy is debating a new national minimum wage. That pushes up the whole wage distribution. Lucas: Yes. And this is where the ECB's job gets tricky. Because if wage growth is being driven by minimum wage policy and one-off catch-up payments, it might fade on its own over the next year. But if it's becoming embedded in collective bargaining norms — where workers now expect 4 to 5 percent annually — then the ECB may need to keep rates higher for longer. Luna: And what about productivity? If wages rise but productivity keeps up, unit labor costs don't necessarily fuel inflation. But Eurozone productivity growth has been abysmal — around 0.5 percent annually. Lucas: That's the real sting. With productivity barely growing, those wage increases translate almost one-for-one into higher unit labor costs. The ECB's own estimates suggest unit labor costs rose 4.2 percent year-over-year in Q1. That's a lot of cost pressure on companies, and it inevitably shows up in prices — especially in services, where labor is the dominant input. Luna: So what's the outlook? Do you think wage growth will decelerate meaningfully by year-end? Lucas: I think it will moderate, but slowly. The catch-up effect will fade as inflation stays low, so real wages will stop falling and union demands will become less aggressive. But structural factors — like tight labor markets in certain skilled roles and minimum wage momentum — will keep a floor under wages. I'd expect negotiated wage growth to end 2026 around 3.5 to 4 percent. Still above target, but moving in the right direction. Luna: And the ECB? Lagarde hinted at a potential rate cut in July, but this wage data probably gives the hawks ammunition to wait until September. Lucas: Absolutely. The market is pricing in a 70 percent chance of a cut in September, down from 90 percent a month ago. The wage numbers are a key reason. If the June wage tracker shows another quarter above 4 percent, I think September becomes uncertain too. Luna: Let's talk about the divergence within the Eurozone. Because wage growth isn't uniform — it's much higher in Germany and Spain than in, say, France or Italy. Lucas: That's an important point. In Germany, negotiated wages are running at 5.1 percent; in Spain, 4.8 percent. But in France, it's closer to 3.6 percent, and in Italy, about 3.2 percent. Why? Partly because France and Italy have more centralized wage bargaining systems that produce lower settlements, but also because their labor markets are weaker — unemployment is higher, so workers have less bargaining power. Luna: So the ECB has to set one policy for a region where wage pressures are very uneven. That makes the calibration really hard. Lucas: It does. And it's one reason why some policymakers — like Italy's Governor Visco — have argued for more patience, because the weaker economies can't handle higher rates. But the hawks, led by Germany's Nagel, say you have to look at the whole euro area average, which is still too hot. Luna: If today was actually useful to you, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. We put a lot of work into digging into these numbers, and knowing it helps people makes it worthwhile. Lucas: Absolutely. Every bit of support keeps us independent and focused on the data. And we really appreciate it. Luna: Back to the divergence point — is there any risk that the high-wage countries pull up wages in the low-wage countries through labor mobility or competitive pressure? Lucas: Some, but not much. Labor mobility within the Eurozone is still limited by language and cultural barriers. What's more likely is that firms in high-wage countries invest in automation to reduce labor costs, while low-wage countries become more attractive for labor-intensive production. That could actually widen the productivity gap. Luna: So the wage growth story is really a tale of two Europes — the core where wages are rising fast and labor markets are tight, and the periphery where wages are more subdued and unemployment is higher. Lucas: Exactly. And that's the challenge for the ECB — they have to manage inflation expectations in the core without crushing the recovery in the periphery. It's a balancing act that will define monetary policy for the rest of the year.