Commentary Directory

Euro Area Labor Costs: Q4 2023

Jacob Hess
March 19, 2024

Wage growth has been an area of focus for the the ECB in its fight against inflation over the last two years. In an interview this morning, ECB's VP Luis de Guindos notes that the main risk to the “very clear disinflationary process” is “the combination of high wage growth, which is currently hovering around 5%, and very low productivity.” Hours later, Eurostat released the latest update on hourly labor costs in the euro area that comes out once a quarter.

In Q4 2023, hourly labor costs increased 3.4% YoY in the euro area which is a strong deceleration from the 5.2% YoY in Q3 2023 and the lowest since Q3 2023. Of the individual components of labor costs, the growth in wages & salaries was just 3.1% YoY, down from 5.2% YoY previously, while the non-wage component grew 4.2% YoY. Looking at the service sector in specific, wage growth easing is evident but still slightly faster than the headline number. The increase in nominal hourly labor costs of services was reported at 4.1% YoY in Q4 2023 (prev 5.7% YoY) with wages & salaries growing 3.7% YoY (prev 5.7% YoY).

This deceleration in observed labor costs in both the general economy and the service sector should weaken the risks to disinflation that ECB's Guindos mentioned in his interview. The ECB VP's rough inflation projection has that “inflation in 12 to 18 months from now will be hovering around our 2% target.” It is almost certain that this forecast looks for significant wage growth moderation like we see in Q4 2023. Up next, the ECB will watch closely how wage bargaining agreements develop and conclude in the beginning of the year. Guindos notes “We will have more information in June,” which is when many believe the ECB could first cut rates.