Europe’s economic recovery is getting a much-needed boost from rising wages and higher incomes. But in countries where population aging is shrinking the workforce, policymakers may soon face new challenges. Short-term wage pressures could combine with longer-term tightness in labor markets to stoke inflationary pressures.
After two years of falling purchasing power, it’s not surprising that Europe’s workers are pushing for more pay. Nominal wages rose by 4.5 percent in the euro area and more than 10 percent in other parts of Europe in the first half of this year. Higher wages help alleviate cost-of-living pressures and support economic expansion.
But improved productivity, coupled with tight macroeconomic policies which limit companies from passing on higher costs to consumers, are essential if economies are to afford much higher wages without fanning inflation, as discussed in our latest Regional Economic Outlook.
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