globalen
Graph of the week

Graph of the week

22-03-2019 | Insight

Disappointing wage growth

  • Peter van der Welle
    Peter
    van der Welle
    Strategist

The tightness in the labor market is rising steadily, with demand outstripping supply. In the current pro-longed economic expansion, this situation has now become a worldwide phenomenon. Last week's NFIB survey in the US, for example, indicated that not only the big players but also medium- and small-sized companies are really struggling to fill vacancies. The competition between companies to attract suitable employees has pushed up wages in the country by 3.4% (YOY) in the past year. 

We are also seeing tightness on the European continent, with German companies in particular experiencing labor shortages as a bottleneck for further growth. Wage growth in Europe now stands at 2.4% (YOY). But, while it’s logical that this situation is boosting workers’ bargaining power, how much wage growth should we actually expect in the Eurozone given the tightness? The graph below gives the answer. 

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Source: Thomson Reuters Datastream, Robeco

The green line is a regression analysis that attempts to explain the actual wage growth by looking at a tightness indicator for the Eurozone labor market. This tightness indicator is the difference between actual unemployment in the Eurozone (currently 7.9%) and equilibrium unemployment (which the OECD estimates at 8.1%). A tight labor market can be defined as a market in which actual unemployment has fallen below equilibrium, long-term unemployment.

No overheating

It is interesting to see the 2.4% wage growth in the Eurozone, shown by the turquoise line, is currently below what you would expect purely on the basis of the model (2.8% YOY). Therefore, we can’t yet say that the labor market is overheating, where labor bargaining power really takes off. 

And that isn’t such a bad thing, because often you see a process like this shortly before a recession – as in 2008 and 2011. Wage costs then rise so rapidly that companies can no longer absorb them by upping their product prices, which ultimately leads to a contraction in their profit margins and lower economic growth. 

Why, despite the tight market, is wage growth lower than you would expect? Low labor productivity in the Eurozone plays a role in this, as do changes in the current labor market caused by the increase in part-time work, the decline of union power and the fear of automation (resulting in lower wage demands). Economically speaking, there should still be some honey left in the pot for employees in the Eurozone, but changes in the structure of the labor market are limiting their potential. 

Subjects related to this article are:

Disclaimer

The information contained in the website is solely intended for professional investors. Some funds shown on this website fall outside the scope of the Dutch Act on the Financial Supervision (Wet op het financieel toezicht) and therefore do not (need to) have a license from the Authority for the Financial Markets (AFM).

The funds shown on this website may not be available in your country. Please select your country website (top right corner) to view the products that are available in your country.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports, which can be all be obtained free of charge at this website and at the Robeco offices in each country where Robeco has a presence.

By clicking Proceed I confirm that I am a professional investor and that I have read, understood and accept the terms of use for this website.

Decline