Fall of unemployment will boost wages in the euro zone, but gradually, says the BdP – The Economic Journal

Fall of unemployment will boost wages in the euro zone, but gradually, says the BdP - The Economic Journal


Wages in the euro zone should continue to accelerate, maintaining the gradual growth path since 2016, according to the October Economic Bulletin of the Banco de Portugal (BdP), released on Thursday.

The analysis to the international context of the regulator stresses that the decrease in the unemployment rate "should continue to contribute positively to the gradual acceleration of wages", as foreseen in the Eurosystem staff projections of September 2018, and driven by salary negotiations.

"While up to the end of 2017 the acceleration of salaries per employee was mainly due to wage deviation, in 2018 this has reflected mainly higher growth rates of negotiated wages, which seem to have begun to react to the improvement of labor market conditions , although with a greater lag than in the past, "explains the Bop.

The regulator notes, however, that on average analysts 'expectations for the annual growth rate of 2.2% in 2020 are below the Eurosystem experts' projection (2.7%).

This scenario thus alters the trend up to mid-2016 in which the decrease in the unemployment rate in the euro area has not been accompanied by a wage acceleration since the beginning of the economic recovery. From period has increased in "gradual manner". The analysis of the international context of the regulator indicates that the "historically low" wage growth resulted mainly from the "negative and persistent contribution" of the unemployment rate.

"From 2014 until the middle of 2017 there was a gradual reduction of this contribution in a context of a decrease in the unemployment rate. However, this reduction in the unemployment rate was offset by a negative contribution of inflation in a historically low inflation environment in the euro area, "the BOP explains.

The Bop notes that "the existence of significant and persistent negative waste" by the first quarter of 2018 "suggests that other determinants, other than those considered in the model, have put a negative pressure on wages," such as the impact of structural reforms of the labor markets implemented in several countries, changes in the composition of employment and advances in the automation process.

It warns, however, that "the role of these factors is not consensual and the existing empirical evidence does not allow us to discern their relative contributions".



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