Insight
The German wage puzzle by John Springford 1 May 2018
Shifts in the relationship between wages and unemployment in Germany mean the European Central Bank (ECB) should continue its stimulus for longer. The eurozone’s recovery has been powered in part by monetary stimulus in the form of quantitative easing (QE), which the ECB has continued despite comparatively fast growth in 2017. In March 2018, the inflation rate picked up to 1.4 per cent, which prompted demands that the ECB start to withdraw its stimulus. Unemployment across the eurozone is falling fairly rapidly. But the ECB should ignore the temptation to reduce its bond-buying programme for now: wage growth is subdued despite falling unemployment – and Germany appears to be the culprit. Economists have recently pointed out that the relationship between unemployment and wages has changed in the UK and the US. Usually, low unemployment leads to wage increases, as bosses have to pay more to tempt workers to give up their existing job. Yet the unemployment rate in the UK and US is now where it was in the run-up to the 2008 crisis, while wage growth has been weak. Eurozone unemployment is nearing its pre-crisis level, but just as in the UK and the US, wage growth has also been weak. What is going on? Chart 1 shows the relationship between wage growth and the unemployment rate in the eurozone, for the 2000-08 period, and the 2010-17 period – the so-called wage Phillips curve. The last two economic cycles are clearly visible, and during the euro crisis wages fell as unemployment rose much as they did during the 2001-02 recession. However, since 2015 falling unemployment has not pushed up wages. Rather, wage growth has flatlined between the first quarter of 2015 and the last quarter of 2017, at around 1.5 per cent.
CER INSIGHT: The German wage puzzle 1 May 2018
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