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News | Question of the Week, WC 18th March
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Question of the Week, WC 18th March

Q: What is the message from EZ wage indicators? 

A: This week brought the final piece of evidence from the myriad of EZ wage data. Growth in hourly and unit labour costs are edging higher, but our first chart below shows that these data are very long-lagging. They tend to peak in the middle of recessions, and we wouldn’t make any decisive conclusions based on them. Indeed, they are better as contrarian indicators. If you ever see a chart with rising unemployment and accelerating growth in labour costs, run for the hills. 

The employee compensation data are better. The ECB’s preferred measure which takes total compensation as a share of employment is rising by about 2-to-2.5% year-over-year, a message corroborated by growth in negotiated wages, which focus on income growth as part of collective bargaining agreements. Taken these data at face value, the message is that EZ consumers are now enjoying real wage growth of about 1% year-over-year, though the story differs significantly from sector to sector and country to country. German households are doing best, while the rest are lagging. Finally, these data also signal higher core inflation, but slowly does it. The Phillips Curve has flattened, and wage growth mainly influences services inflation—60% of the core index—while the goods CPI mainly is buffeted by shifts in the cycle in global manufacturing, which, currently, is pointing to weakness ahead. 

Claus Vistesen, Chief Eurozone Economist

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Posted: 22nd Mar 2019

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