There is light at the end of the tunnel at last. Workers in the eurozone are finally seeing the signs of a five-year-old recovery in their own pockets, with wage growth picking up to 2 per cent year on year, the fastest pace since an aborted spurt in 2012.
The obvious reaction to this development should be to welcome it — and immediately add “not before time”.
Wage growth has been miserable for a decade, not just in the eurozone, but across the rich world. One of the worst performers — since long before the Brexit vote — has been the UK, where average real wages remain lower than a decade ago. As the new employment report from the OECD, the Paris-based club of mostly rich nations, showed this week, only Greece and Mexico have done worse. Several eurozone countries, on the other hand, have done relatively well, with workers in France and Germany keeping up with those in Canada. Their wages are all more than 10 per cent higher in real terms than they were a decade ago, twice the increase seen in the US.
Even so, being the best of a bad lot is still not good. The latest wage acceleration in the eurozone leaves pay packets barely keeping pace with inflation, which is being driven up by higher oil prices.
It is to be hoped, then, that the perkier wage growth continues, and strengthens. The signs are that it may: workers in many countries are shedding the timidity they adopted during years of high unemployment and austerity, and are beginning to ask for meaningful pay deals. Forecasters think they will get what they want.
Yet curmudgeonly voices might still grumble that this return to normal wage growth should prompt the European Central Bank to act faster to “normalise” monetary policy, by raising interest rates and shrinking its balance sheet.
That would be a mistake. The pace of wage growth, while better than it was, remains far from normal. As the OECD points out, wages are “remarkably more sluggish than before the crisis” at comparable levels of employment.
That leaves little reason to think more robust wage growth will put much pressure on prices. Wage inflations will not necessarily feed directly into price inflation: wages could rise more than prices if productivity growth picks up, or income shifts from capital to labour. Both would represent a desirable reversal of former trends.
The causes of the worldwide productivity slowdown remain hazy. But some contributing factors are clear, and in the process of being reversed. Businesses and government cut investment deeply during the crisis. It has only slowly picked up in a shallow recovery. That has left a hole of unreplenished capital in most economies. The good news, however, is that businesses are investing again. That should set off a virtuous cycle in which demand can feed off itself, increasing the economy’s capacity in the process.
Productivity potential aside, there is also plenty of room to restore the withered share of workers in national income and growth. Before the crisis, the profit share of national income was rising in many economies. Most notoriously, Germany’s policy in the early 2000s to depress the labour share of income bears much of the blame for the financial bubbles in the periphery.
Workers in the eurozone have been hard done by for a long time, partly due to global economic forces and partly through policy mistakes of the single currency zone’s own making. Even if wage acceleration sticks, it will only begin to make up for past stagnation. Trying to rein it in to forestall chimerical fears of economies overheating would only add insult to injury.