In the latest Global Economy Watch, PwC economists turn their attention to Eurozone labour markets, by modelling the relationship between unemployment and wages. They found that -similar to what has been observed in the US and the UK- this relationship has become flatter and weaker, asdespite tightening labour markets, wages have not yet picked up as economic theory would predict.
A number of factors could explain this trend, some of which have been common across most advanced economies. These include the gradual decline of unionisation, which reduces the bargaining power of labour, the digitalisation of work, the gradual rise of the gig economy, as well as other changes in the structure of the economy.
Focusing on the Eurozone, PwC economists found that there are more specific factors which explain why the link between unemployment and wages has weakened. These include:
- The creation of the European Central Bank, which adjusted downwards the inflation expectations of workers in Southern Eurozone economies, which typically used to experience high rates of inflation
- Admission in the Eurozone of Eastern European economies, some with lower income levels, which made labour supply more elastic over time.
As indicated by the analysis, assuming no other change to structural factors, future wage increases in the Eurozone are likely to be dependent on productivity increases rather than slack in the labour market. This places a greater onus on governments and businesses to boost the productivity level of their workforce by investing in hard infrastructure such as roads, airports and other utilities, and soft infrastructure including formal education, vocational and other training. These improvements are a prerequisite for income growth in the future.
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