Thursday, December 21, 2017

Growth of real wages in the EU15 since the start of 2014

Eurostat published Q3 2017 nominal hourly labour costs data earlier in the week.  Adjusting for inflation, using the Harmonised Index of Consumer Prices, we see the following picture emerge for the wages and salaries component of real labour costs since the start of 2014:

Real Wages and Salaries in the EU15

Using this approach it can be seen that Ireland has had the second-highest increase in real hourly wages since the start of 2014.  This might look good in relative terms but in absolute terms the increases remain modest.

Here is what emerges if we look at annual growth rates (smoothed over four quarters).

Annual Growth in Real Wages and Salaries in the EU15

There are maybe two ways to interpret this.  The first, is that Ireland has the highest growth in real hourly wages in the EU15.  This growth has accelerated slightly in recent times but not massively so.  The second is that the growth of real wages has slowed in almost all EU15 countries with 11 of the 15 having a slower growth rate of real wages compared to a year ago.

The reason for this has not been a slowdown in nominal wage growth, if anything this has slightly picked up with 11 countries showing a higher nominal wage growth in Q3 2017 compared to a year earlier.  The arithmetic mean for the EU15 has gone from 1.1 per cent to 1.5 per cent.  Ireland too has seen an increase in nominal wage growth but not unusually so.  The smoothed average growth has gone from 1.2 per cent in Q3 2016 to 2.1 per cent in Q3 2017.

Annual Growth in Nominal Wages and Salaries in the EU15

The reason for the slowdown in real wage growth across the EU15 has been the uptick in inflation.  The annual inflation rates from the HICP applied to the above nominal wages changes went from a mean of 0.3 per cent in Q3 2016 to a mean of 1.4 per cent in Q3 2016 with the UK, particularly showing a rapid rise in inflation. 

Annual HICP Inflation in the EU15

It’s all to with the second derivatives.  Inflation is rising faster than the increases in the growth of nominal wages hence real wage growth is slowing down – for most countries.

Ireland is one of the exceptions.  The increase in nominal wage growth over the past year in Ireland (0.9pp) is slightly above the simple average increase seen across the EU15 (0.4pp).  Inflation, though, has been non-existent in Ireland for an extended period now and remained close to zero throughout the period shown above.  Over the past year Ireland has had the smallest increase in inflation in EU15 and now has the lowest rate of inflation across the group – and this is including the large contribution made by the rapid increases in private rents. 

So put together our modest, though increasing, growth rates in nominal wages with our low rates of inflation and we get the result that Ireland has the fastest growth of real hourly wages in the EU15. For now anyway.

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