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Euro-Zone Wage Growth Surges in Test for ECB Rate Cuts

 


A key gauge of euro-zone wages jumped by the most since the common currency was introduced in 1999 — complicating the European Central Bank’s plans for interest-rate cuts as inflation eases.

Third-quarter negotiated pay rose 5.4% from a year ago, the ECB said Wednesday. That’s up from 3.5% in the previous three months and was largely driven by Germany.

Euro-Zone Negotiated-Wage Growth Jumps

Source: ECB

The data come less than four weeks before the ECB’s final policy meeting of the year, with officials tipped to lower the deposit rate for a fourth time. The surge in pay, however, could dampen expectations among investors and analysts for a spate of rate reductions in 2025.

While most officials have signaled that more cuts are likely, particularly as the economy struggles to gain traction, the pace and extent are becoming increasingly controversial.

Some policymakers want rapid moves to underpin activity and avoid an inflation undershoot. Others urge prudence, mainly because of sticky price pressures in the services sector, where wage growth remains strong.

What Bloomberg Economics Says...

“The sharp increase in negotiated wages for the euro area in 3Q24 will make for uncomfortable reading for the hawks on the Governing Council, but is unlikely to prevent the ECB from reducing rates again in December. Policymakers have already shifted their focus to more forward-looking indicators of pay growth and the broader inflation outlook is much less worrying.”

—David Powell, senior euro-area economist.

The ECB forecasts a sharp slowdown in pay increases in 2025 and 2026, helping to return inflation sustainably to the 2% target.

In Germany, negotiated wages, including ancillary agreements, rose 8.8% from a year ago in the third quarter — the quickest rate since 1993, the Bundesbank reported on Tuesday.

But it also said the period may have marked the peak for wage increases so that pace is unlikely to last.

Last week’s IG Metall key settlement for the manufacturing sector already locked in relatively moderate pay growth for the next two years.

While the ECB’s inflation assumption is based on a slowdown in salaries, it also doesn’t want the labor market and advances in pay to moderate too much.

Chief Economist Philip Lane said in October that a more robust jobs market “increases the likelihood of hitting the inflation target rather than being chronically below,” and that “wage increases would be more target-consistent in the coming years” than pre-pandemic.

Target etched out a slim sales increase in the third quarter but profits slumped as inflation-weary customers pulled back on spending and costs related to a dockworker strike in October dragged on results.

The Minneapolis retailer fell short of Wall Street expectations for the quarter and its outlook for the final three months of the year also disappointed industry analysts in an environment in which Americans are still spending, but being more selective.

The most recent quarter at Target stands in stark contrast to rival Walmart, which reported another quarter of stellar sales Tuesday and released optimistic projections for the holiday season.

Shares plummeted 14% before the opening bell Wednesday.

Workers in the U.S. are running in place — feeling stuck in jobs with dimmed prospects of advancement and seeing fewer opportunities to jump ship for something better.

 It's a sharp contrast to the heady days of 2022 — when employees were quitting their jobs at record-high rates, open roles proliferated and the possibility of a higher paycheck always seemed just around the corner.

Employers are sitting tight, says Daniel Zhao, chief economist at job site Glassdoor. Companies aren't making big changes to their hiring strategy. That means "fewer opportunities for workers to climb the career ladder," he says.

  • They're still plugging away at the same role they've had for years without the opportunity to move up internally or at a new company.
  • 65% of the 3,400 professionals surveyed by Glassdoor last month said they feel stuck in their current role.
  • "As workers feel stuck, pent-up resentment boils under the surface," Zhao wrote in a report out yesterday.

By one broad measure — a relatively low unemployment rate of 4.1% — the job market looks good. Under the hood, though, things are stagnating.

  • The rate at which workers quit their jobs in September was 1.9% — the lowest since June 2020 and, outside of Covid, a level last seen in 2015.
  • It's well off the highs of the Great Resignation a few years ago.

The number of job openings in September was 7.4 million — a decline of 1.9 million from the previous year, though still higher than in 2019.

  • And while layoffs are still low — below pre-pandemic levels — that's cold comfort if you want a new job or you're just starting out in the working world.
  • An increasing share of those who do job hop are settling for lower paychecks. Some 17% of job switchers this year took a pay cut, compared to 14% in 2019, according to data from jobs site Glassdoor.

 That the labor market just a few years ago was so exceptional — and worker leverage so high — makes today's stagnating job market even more of a bitter pill.

 Workers in the tech industry likely feel this more than most — throughout the 2010s there was a war for talent in tech and in the post-pandemic period hiring boomed even more, making wages soar.

  • Employers were even hoarding workers at one point.
  • Those days are long gone. Employee satisfaction with career opportunities in information technology has declined by 7.5% this year from 2022, according to an analysis of Glassdoor reviews.
  • "Tech is the poster child of the problems we're seeing right now in the job market," Zhao says. "There are a lot of people who feel like that promise once offered to them no longer applies."

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