Stuart Gentle Publisher at Onrec

Wage Growth Has Slowed But Remains High in Much of Europe – and Looks Poised to Stay that Way in the Near Term

We expect annual growth in compensation per employee in the euro area to rise to 5.0% in the second quarter of 2024 before declining further.

Pawel Adrjan, Reamonn Lydon & Vahagn Galstyan

Key Points:

  • Wages in job postings, as measured by the Indeed Wage Tracker, grew at an annual rate of 3.1% in the US, 7.0% in the UK and 3.7% in the euro area in June 2024.
  • We estimate annual growth in total euro-area Compensation per Employee (which includes items not captured by advertised salaries, such as one-off payments to compensate current workers for past inflation) was 5.0% in the second quarter, up from 4.9% in the first quarter. While this is still notably lower than the post-pandemic peak of 5.5% reached in 2023, it is a sign that aggregate wage growth is likely to remain high in the euro area through 2024.

June data from the Indeed Wage Tracker suggests that annualized wage growth in the US, the UK and the euro area appears to have levelled off – but at different levels and with very different implications for their respective economies. In the US, posted wage growth appears to have stabilised at pre-pandemic levels, a welcome sign of labour market normalisation. But posted wage growth in the euro area and the UK has seemingly stabilised at rates that are higher than pre-pandemic norms. And our new forecast suggests that total euro-area compensation costs as measured by the European Central Bank remained elevated throughout the spring and early summer and are likely to stay high in the near term.

As policymakers worldwide attempt to bring down the rate of inflation, which spiked in the years immediately following the pandemic and has stayed uncomfortably high despite the efforts made to contain it, wage growth has emerged as one of the key inflation uncertainties. As global supply chains have normalised and the goods shortages that characterized the early years of the pandemic have faded, the attention of policymakers has turned to domestic drivers of price increases. Wages are an important driver of domestic inflation, both from a demand perspective (supporting consumption) and a supply perspective (raising firms’ costs). The latter is especially relevant in the services sector, where wages account for a greater share of input costs, and where inflation has generally been stickier in recent months.

Wage growth appears to be stabilising rather than continuing to fall

Annual euro-area wage growth stood at 3.7% in June, according to the Indeed Wage Tracker, down from a post-pandemic peak of 5.4%, but up slightly from 3.5% in March, April and May and still well above the pre-pandemic range of 2% to 2.5%. The general but hardly uniform downward trend in euro-area wages reflects the staggered nature of real-wage catch-up resulting from collective bargaining in Europe. This also partly explains why annual euro-area wage growth has been broadly flat since the start of 2024, moving in a tight range of 3.4% to 3.8%.

In the UK, annual wage growth in June ticked up to 7.0% from 6.9% in May, just below its recent 2023 peak of 7.1%. Strong UK wage growth is evident across all pay ranges, for low, medium and high-paying jobs. While headline UK inflation is in line with the Bank of England’s target for the first time in three years, the elevated rate of wage growth remains concerning to some monetary policymakers who worry it indicates sustained domestic inflationary pressures.

Annual US wage growth in June was 3.1% for the third consecutive month, showing signs of stabilising at the pre-pandemic level. If this levelling off continues in the coming months, it will be a sign that the US labour market has successfully rebalanced.

Our euro-area wage growth estimate is an employment-weighted average of six countries – Germany, France, Ireland, Italy, the Netherlands and Spain – that collectively account for approximately 80% of euro-area employment. Recent trends differ across these countries. Wage growth has been stable or falling in France, Germany and Ireland, and is already at or close to pre-pandemic levels in those countries. But in Italy, the Netherlands and Spain, wage growth has been picking up and remains high relative to national pre-pandemic averages.

Spotlight: Euro area wage growth in Q2 2024 

The ECB projects wage growth as part of a broader measure known as Compensation per Employee (CPE), which is constructed from national accounts data and released at a long lag. For example, aggregated euro area CPE for the first quarter of 2024 was published as part of the national accounts release on 7 June, and official data for the second quarter will not be published until 6 September. This wide gap between the end of the quarter and data publication is a problem for policymakers, especially in times of elevated uncertainty.

But monthly data from the Indeed Wage Tracker is available shortly after the end of each month, and we have used it to construct more timely, near-term projections for year-on-year growth in CPE in the second quarter of 2024. Our projection for Q2 2024 ranges from 4.3% to 5.0%, depending on whether or not information from negotiated wage data is included in the model.

Our headline forecast of 5.0% CPE growth includes negotiated wage data because incorporating this information creates a closer match with CPE in the historical data sample to the end of the first quarter of 2024. This makes intuitive sense if wage agreements include things like one-off cost-of-living payments or back-dated real wage catch-up that may not be captured in advertised wages and salaries but do affect the total pay of current workers (i.e., the basis of the CPE estimate). In general, we find that the negotiated wage data improves the projection the most in Germany – where one-off payments have tended to be larger in recent months – but plays less of a role in the other countries. A projection based only on negotiated wages performs very poorly historically, so the Indeed Wage Tracker is a key component of our forecast. See the methodology section below for more details.