Europe’s Workers Brace for Tough Times as Real Wages Fall

The only difference with the U.S. now: Pay rises in Europe are lagging far behind inflation, leading to a sharp decline in real wages—wages adjusted to take consumer-price rises into account.

“We budget 100 euros for each trip to the supermarket and we keep coming back with less and less food,” said Daniele Biancardi, a 37-year-old bar worker in Milan who lives with his girlfriend. “Your wage is what it is. It’s not like the boss sees that meat costs more now so he raises your pay a little bit. You are working for the same pay, but every week you feel like you can buy less.”

The Organization for Economic Cooperation and Development expects U.S. real wages to fall 0.6% this year, an indication that wage rises are just short of matching consumer-price gains. That is good for neither households nor the economy’s growth prospects.

But far larger declines are expected in much of Europe, with the exception of France, where energy costs have risen much less due to its reliance on nuclear power and a government cap on home energy prices. According to the OECD, real wages are set to drop by 2.5% in Germany, 3% in the U.K. and 4.5% in Spain.

That marks a divergence compared with the prepandemic era, when movements in real wages in the U.S. and Europe matched closely. In 2019, real wages rose by 1.1% in the U.S. and by 1.6% in Germany.

Before the invasion, the European Central Bank expected the eurozone’s annual rate of inflation to average 3.2% this year, above its 2% target. By June, when the bank produced its most recent forecasts, the expectation was that inflation would average 6.8%.

Most Europeans don’t expect their wages to rise at anything like the rate of consumer-price inflation over the coming 12 months.

Around 70% of Germans and Italians don’t expect their pay to rise this year, a view shared by over 60% of Britons, but just half of French workers, according to a June survey of 4,000 Europeans by market-research firm Dynata.

That is backed up by earlier research by Ireland’s central bank and polling firm Ireland Thinks. They found a pickup in Irish workers’ inflation expectations in April, with the 1,418 respondents expecting on average that prices would rise by 10% over the coming 12 months, up from 6.8% in January. Meantime, more than half of workers in Europe’s fastest-growing economy expected their wages to stay the same, while a third saw the prospect of a slight rise and just 1.9% a large rise.

“Among those respondents who expect their earnings to increase, the vast majority expect their earnings to increase by less than consumer prices,” the central bank said.

There are exceptions to this resignation, particularly where workers are still represented by powerful unions, which is increasingly rare in Europe.

Last week, German metalworkers union IG Metall secured a 6.5% wage increase as part of an 18-month deal with iron and steel companies. That was the largest increase in three decades, according to union chief

Jörg Hofmann.

“For the employees, the result means a noticeable relief in view of the sharp rise in prices,” he said.

Heinz Jörg Fuhrmann,

the head of a German steel industry body, described the deal as “just about acceptable.”

“It remains to be hoped that the risks looming on the horizon for the German economy will at least not unfold to their full force,” he said.

Other German unions have agreed to one-off payments to cover higher energy costs, while delaying talks over longer-term pay deals until later in the year, when they hope the outlook will be clearer. That was the approach taken by Germany’s IGBCE chemical workers union.

Overall, union wages in Germany were up 4% in the first quarter of 2022, according to its Federal Statistics Office. Adjusted to account for one-off payments, union wages rose just 1.1%, well below the 5.8% increase in consumer prices.

This week, the government warned that households’ bills for gas, which most Germans use for heating, could triple this year.

Elsewhere, workers feel squeezed between price rises making it harder to pay bills, and the difficulties facing their employers, sometimes because spending power is set to decline.

Londoner Mukkid Miah works as a manager for a restaurant that is reluctant to raise its prices for fear of losing customers. “Everything has gone up in price, and unfortunately we can’t put the prices up because people think the prices are too much already,” he said.

Instead, Mr. Miah has cut his personal spending by switching to discount stores. “Shopping [costs] has gone up by 20 percent on average, flat out,” he said. “We’re not getting the quality of the item that we want, but we have to adjust because the wages have not gone up.”

Economists think the different ways in which the pandemic affected jobs markets on either side of the Atlantic is playing a role in the outlook for real wages.

In Europe, a larger proportion of workers remained in employment, albeit on reduced hours, while governments subsidized their wages. In the U.S., many lost their jobs or moved on and sought new employment as the economy reopened.

Workers are typically in a stronger position to get large pay rises when starting with a new employer, regardless of the tightness of the jobs market.

“Where there were job retention schemes, people were not let go and were not rehired, so they weren’t negotiating wages,” said

Laurence Boone,

the OECD’s chief economist. “Where people are let go, you have to rehire them, and they ask for higher wages.”

—Elissa Miolene in London contributed to this article.

Write to Paul Hannon at [email protected], Eric Sylvers at [email protected] and William Boston at [email protected]

The only difference with the U.S. now: Pay rises in Europe are lagging far behind inflation, leading to a sharp decline in real wages—wages adjusted to take consumer-price rises into account.

“We budget 100 euros for each trip to the supermarket and we keep coming back with less and less food,” said Daniele Biancardi, a 37-year-old bar worker in Milan who lives with his girlfriend. “Your wage is what it is. It’s not like the boss sees that meat costs more now so he raises your pay a little bit. You are working for the same pay, but every week you feel like you can buy less.”

The Organization for Economic Cooperation and Development expects U.S. real wages to fall 0.6% this year, an indication that wage rises are just short of matching consumer-price gains. That is good for neither households nor the economy’s growth prospects.

But far larger declines are expected in much of Europe, with the exception of France, where energy costs have risen much less due to its reliance on nuclear power and a government cap on home energy prices. According to the OECD, real wages are set to drop by 2.5% in Germany, 3% in the U.K. and 4.5% in Spain.

That marks a divergence compared with the prepandemic era, when movements in real wages in the U.S. and Europe matched closely. In 2019, real wages rose by 1.1% in the U.S. and by 1.6% in Germany.

Before the invasion, the European Central Bank expected the eurozone’s annual rate of inflation to average 3.2% this year, above its 2% target. By June, when the bank produced its most recent forecasts, the expectation was that inflation would average 6.8%.

Most Europeans don’t expect their wages to rise at anything like the rate of consumer-price inflation over the coming 12 months.

Around 70% of Germans and Italians don’t expect their pay to rise this year, a view shared by over 60% of Britons, but just half of French workers, according to a June survey of 4,000 Europeans by market-research firm Dynata.

That is backed up by earlier research by Ireland’s central bank and polling firm Ireland Thinks. They found a pickup in Irish workers’ inflation expectations in April, with the 1,418 respondents expecting on average that prices would rise by 10% over the coming 12 months, up from 6.8% in January. Meantime, more than half of workers in Europe’s fastest-growing economy expected their wages to stay the same, while a third saw the prospect of a slight rise and just 1.9% a large rise.

“Among those respondents who expect their earnings to increase, the vast majority expect their earnings to increase by less than consumer prices,” the central bank said.

There are exceptions to this resignation, particularly where workers are still represented by powerful unions, which is increasingly rare in Europe.

Last week, German metalworkers union IG Metall secured a 6.5% wage increase as part of an 18-month deal with iron and steel companies. That was the largest increase in three decades, according to union chief

Jörg Hofmann.

“For the employees, the result means a noticeable relief in view of the sharp rise in prices,” he said.

Heinz Jörg Fuhrmann,

the head of a German steel industry body, described the deal as “just about acceptable.”

“It remains to be hoped that the risks looming on the horizon for the German economy will at least not unfold to their full force,” he said.

Other German unions have agreed to one-off payments to cover higher energy costs, while delaying talks over longer-term pay deals until later in the year, when they hope the outlook will be clearer. That was the approach taken by Germany’s IGBCE chemical workers union.

Overall, union wages in Germany were up 4% in the first quarter of 2022, according to its Federal Statistics Office. Adjusted to account for one-off payments, union wages rose just 1.1%, well below the 5.8% increase in consumer prices.

This week, the government warned that households’ bills for gas, which most Germans use for heating, could triple this year.

Elsewhere, workers feel squeezed between price rises making it harder to pay bills, and the difficulties facing their employers, sometimes because spending power is set to decline.

Londoner Mukkid Miah works as a manager for a restaurant that is reluctant to raise its prices for fear of losing customers. “Everything has gone up in price, and unfortunately we can’t put the prices up because people think the prices are too much already,” he said.

Instead, Mr. Miah has cut his personal spending by switching to discount stores. “Shopping [costs] has gone up by 20 percent on average, flat out,” he said. “We’re not getting the quality of the item that we want, but we have to adjust because the wages have not gone up.”

Economists think the different ways in which the pandemic affected jobs markets on either side of the Atlantic is playing a role in the outlook for real wages.

In Europe, a larger proportion of workers remained in employment, albeit on reduced hours, while governments subsidized their wages. In the U.S., many lost their jobs or moved on and sought new employment as the economy reopened.

Workers are typically in a stronger position to get large pay rises when starting with a new employer, regardless of the tightness of the jobs market.

“Where there were job retention schemes, people were not let go and were not rehired, so they weren’t negotiating wages,” said

Laurence Boone,

the OECD’s chief economist. “Where people are let go, you have to rehire them, and they ask for higher wages.”

—Elissa Miolene in London contributed to this article.

Write to Paul Hannon at [email protected], Eric Sylvers at [email protected] and William Boston at [email protected]