Real wages fell in most European countries after record-high inflation eroded most of the nominal wage growth. Which countries are worst impacted?
In 2022, inflation rates rocked the EU, reaching levels not seen before in the previous four decades. Between 1997 and late 2021 in the EU, the highest annual inflation was only 4.4 per cent, as recorded in July 2008.
It reached 11.5 per cent in October 2022. After this peak, inflation began falling, but it was still 6.4 per cent in June 2023 in the EU.
Impact of COVID and Russia’s invasion of Ukraine
According to the Organisation for Economic Co-operation and Development's (OECD) Employment Outlook 2023 Artificial Intelligence and the Labour Market report, the COVID-19 crisis was followed by a significant surge in prices.
Prices began to increase in 2021 due to the rapid rebound from the pandemic and related supply chain bottlenecks. Then, over the course of 2022, the impact on energy prices of Russia’s war of aggression against Ukraine pushed inflation upwards again.
Households are struggling to cope with the resulting cost-of-living crisis. Almost all EU member states have increased the hourly wage in the last year, but that increase has been in nominal terms.
In other words, inflation is not taken into account.
As of the first quarter of 2023, real hourly wages had decreased in 22 countries out of 24 in Europe over the last year. That means that the nominal increases were less than inflation, consequently leading to a fall in real wages.
The real hourly wage increased only in Belgium (2.9 per cent) and the Netherlands (0.4 per cent) between the first quarters of 2022 and 2023.
The decline in real wages varied from 0.8 per cent in Luxembourg to 15.6 per cent in Hungary in this period.
The decline was remarkable in several EU countries as real hourly wages fell by more than 5 per cent. Hungary was followed by Latvia (-13.4 per cent), Czechia (-10.4 per cent) and Sweden (-8.4 per cent).
Real wages are down in the UK, France and Germany
Real hourly wages also fell in France (1.8 per cent), the UK (2.9 per cent) and Germany (3.3 per cent).
Nominal hourly wages increased in all 24 countries on the list by rates varying from 0.6 per cent in Finland to 13.6 per cent in Lithuania.
Year-on-year growth in nominal hourly wages was 9.8 per cent in Hungary, 6.1 per cent in the UK and 4.2 per cent in France.
Evidently, all of these increases in wages were not enough, except in Belgium and the Netherlands, because the inflation rate was still higher than the nominal growth in wages.
The annual inflation rate between the first quarters of 2022 and 2023 varied from 3.2 per cent in Switzerland to 25.4 per cent in Hungary. It was 9.4 per cent in the EU as a whole in this period.
The harmonised index of consumer prices also increased 9 per cent in the UK, 8.2 per cent in Germany and 6 per cent in France over this period.
Real wages since the COVID pandemic
How have real wages in Europe changed since the beginning of the COVID-19 pandemic?
Real wages are currently below pre-pandemic levels in most countries, despite the recent nominal wage growth. The OECD data shows that the real hourly wages between the last quarters of 2019 and 2022 decreased in most of the OECD countries in Europe.
Cumulative change in real hourly wages between Q4 2019 and Q4 2022
The cumulative change in real hourly wages over these three years ranged from -9.6 per cent in Estonia to 7.1 per cent in Lithuania. Real wages fell in 18 of 25 countries in this period.
Real hourly wages increased 1.9 per cent in the UK, followed by France (1.5 per cent). They dropped by 3.2 per cent in Germany.
Low-paying industries fared relatively better
While real wages are falling overall, workers in low-paying industries have often fared relatively better, the OECD report found.
Change between the first quarters of 2022 and 2023 demonstrated real wages performed better in low-paying industries than in high-pay industries in 13 countries out of 23 with data available in Europe.
Greece is an excellent example of this. Real wage in low-paying industries increased 5.1 per cent whereas it fell 2.9 per cent.
This change was also better in this group than in middle-paying industries in 14 countries.
However, this is not a very strong pattern as the changes in high-paying industries are slightly better than those in low-paying fields in some countries such as Italy, Portugal, the UK.
The industries are aggregated into three broad groups.
Low-paying industries: Accommodation and food services, administrative and support services, arts, entertainment and recreation, wholesale and retail trade
Mid-paying industries: Transportation and storage, manufacturing, other services, real estate activities, construction
High-paying industries: Human health and social work, education, professional activities, information and communication, finance and insurance