Wages and Salaries in the Labour Costs of the EU14

Eurostat produce a quarterly labour cost index. A number of sub-components are also produced. Here is the ‘wages and salaries’ component for the Business Economies (NACE B to N) of the EU14 (the previous EU15 now excluding the UK) with Q1 2013 set equal to 100.

All the selected countries have seen nominal hourly wage growth over the period ranging from 43 per cent in Austria to 13 per cent in Italy.  Ireland is second-ranked with an increase of 33 per cent over the period, along with Germany.

Next, we look at the annual growth rates with a four-quarter trailing moving average taken to smooth out some of the volatility in the series.

We seen that annual nominal hourly wage growth in Ireland is fairly stable over the past few years, averaging close to 4 per cent since 2018. This would enough to be Ireland, top of the group in 2019 and again briefly in 2020 but accelerations in many countries has seen Ireland’s relative position drop towards the bottom and is now close to Sweden, Denmark and Finland.

Of course, nominal changes are just changes in numbers. We want to assess real changes, i,.e. changes in the purchasing power of wages. To do that we must adjust for changes in the price level. We will do that with Eurostat’s Harmonised Index of Consumer Prices (HICP).  Here it ins since 2014, with the start of that year set equal to 100.

We can see that the HICP for Ireland was remarkably stably through the most of the period shown. In the HICP for Q4 2020 was little changed from what it has been in Q1 2014, i.e. there was no inflation over the period.  This certainly changed in 2021.  In the last couple of years, prices have risen by around 20 per cent in most of the selected countries. However, the reasons for the inflation have largely been common the relative ranking is largely unchanged.

Compared to Q1 2014, Ireland’s HICP was 18 per cent higher in Q2 of this year. This was the third-lowest increase in the EU14 with Greece and Denmark seeing smaller increases.  The largest increase was in Austria where the HICP was over 30 per cent higher compared to its level in 2014.

Inflation rates are coming down. The use of a four-quarter moving average understates the extent of the recent falls in inflation rates.

Our purpose is to adjust the nominal wage growth rates for inflation. We see that Austria has both the highest nominal wage growth since 2014 (43 per cent) but also the highest price level increases over the same period (HICP +32% since 2014).  Here we combine both Eurostat datasets to get an index of real, i.e. inflation-adjusted, hourly wages.

Combining wage growth and HICP inflation sees the green line move to the top, but the last few years have seen a steep decline. From 2013 to the end of 2020, real wage growth is put at +20 per cent for Ireland, around five percentages points higher than any of the other selected countries. 

During 2021 and 2022, real wages declined as the rate of inflation outpaced the growth of nominal wages.  In recent quarters they have moved closer together and real wages have been stable in Ireland in 2023 though are now only +12 per cent compared to the start of 2013. Much of the gains made up to 2021 have been reversed.  Real hourly wages in Ireland are now back to where they were in 2019.

To conclude here are the latest real annual growth rates for hourly wages:

As shown by the levels, Ireland is back close to zero. Nominal hourly wages are up close to 4.5 per cent and the HICP is around five per cent higher than it was last year.

To better see the trends for individual countries we will use a four-quarter moving average to smooth out some of the volatility.

Ireland has ground to make up to get back to the top spot it held in the pre-COVID years.

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