20171218-NATIXIS-The_lessons_from_wage_formation_in_the_euro_zone_6页_631kb

Flash Economics: Lessons from Wage Formation in the Euro Zone

Core Content

The document analyzes the evolution of wage formation in the euro zone since 1980, highlighting two significant trends that have impacted the relationship between wages, inflation, and unemployment.

Main Trends in Wage Formation

1. Weakening Price Indexation of Nominal Wages

   • The degree of price indexation has sharply declined, meaning that nominal wages no longer react strongly to inflationary or disinflationary shocks.
   • As a result, inflationary shocks have a larger impact on real wages rather than nominal wages.
   • Disinflationary shocks also lead to a significant rise in real wages, as nominal wages do not adjust downward.
   • This is evident in the recent period, where oil price changes caused inflation or disinflation but had little effect on nominal wage growth.

2. Weakening Phillips Curve Effect

   • The negative impact of the unemployment rate on nominal wage growth has also declined.
   • Even with a reduction in unemployment, nominal wage growth and core inflation have not accelerated significantly.
   • This suggests a weaker link between labor market conditions and wage formation.

Key Findings

• Nominal Wage Growth Drivers:

  • Inflation: The coefficient has decreased over time, indicating a reduced influence of inflation on wage growth.
  • Productivity Gains: The coefficient increased in the 2010-2017 period, suggesting that productivity improvements have started to play a more significant role in wage growth.
  • Unit Labour Costs: The coefficient remained zero in recent periods, indicating that unit labour costs have not been a major driver of wage growth.
  • Unemployment Rate: The coefficient has become less negative, showing a diminishing effect of unemployment on wage growth.

• Implications for the Euro Zone:

  • Growth is increasingly influenced by oil prices, which affect inflation and real wages more directly than nominal wages.
  • Monetary policy must be adjusted to a new environment where core inflation remains low even during periods of low unemployment.

Charts and Data

• Chart 1: Shows the relationship between nominal per capita wage growth and inflation over time.
• Chart 2: Depicts the evolution of per capita productivity and unit labour costs.
• Chart 3: Illustrates the unemployment rate in the euro zone.
• Chart 4A, B, C: Highlights the impact of oil prices on inflation and real wages, showing minimal response in nominal wage growth.
• Chart 5: Demonstrates the weak response of nominal wages to unemployment rate changes.
• Chart 6A and B: Reflects the lack of acceleration in unit labour costs and core inflation despite lower unemployment.

Conclusion

The two trends—reduced price indexation and weakened Phillips curve effect—have important implications for the euro zone economy and monetary policy. These changes suggest that traditional models of wage formation may no longer be applicable, and that policymakers need to account for new dynamics in wage and price behavior.

Disclaimer

• The document is intended for professional and qualified investors only.
• It is confidential and must not be disclosed to third parties without prior consent.
• It does not constitute a financial analysis or investment recommendation.
• It is based on public information and not subject to independent verification by Natixis.
• The views expressed are the personal opinions of the authors and do not necessarily reflect the views of Natixis or its affiliates.
• The document may be subject to regulatory restrictions in certain jurisdictions.
• The information is not updated after the publication date and should not be relied upon for future decisions.

Regulatory Information

• Natixis is supervised by the European Central Bank (ECB).
• It is authorized and regulated in France by the ACPR, in Italy by the Bank of Italy and CONSOB, in Spain by the Bank of Spain and CNMV, in the UK by the FCA and PRA, and in the UAE by the DFSA.
• The document is made available to Professional Clients in the Dubai International Financial Centre (DIFC).
• The recipient is required to confirm that they are a Professional Client and return the document if not.