By Maximilian Korell
Inflation is giving European labor unions a powerful negotiating tool and wage stagnation appears far away. Are policymakers right not to be alarmed?
“A voluntary process through which employers and workers discuss and negotiate their relations.”
The definition of collective bargaining might need to change this year in Europe. While a review of the current public and private sector pay largely shows business as usual, the path to settlement and outcome is vastly different this year, given inflationary pressures. For the first time in over a decade, labor unions have leverage – and fully intend to take advantage of it.
At a time when labor markets remain historically tight, corporate margins are expanding on pricing power and central bankers like the Bank of England’s Huw Pill try to tell fellow citizens “to accept that they are poorer,” unions across Europe are deciding to strike to limit the damage of negative real earnings growth – and they are being successful.
Year-to-date, the U.K. has lost 239,000 working days due to strikes. The 1.2 million-strong Unite Union agreed to a 13% wage increase, which will be implemented in several stages. Bus workers gained 10%, lawyers achieved 15% in additional fees, and so on.
The U.K. is not alone. On the continent, the German IG Metall Union just achieved a tax-free €3,000 “inflation equalizer” and a subsequent 8.5% wage increase over two years. The Dutch FNV scored 11% for its metal workers, Belgium’s wage indexation will give workers an 11% increase, and, in Spain, Prime Minister Pedro Sanchez has lifted the national minimum wage by 8%.
For central bankers, interestingly, this does not ring alarm bells just yet. For as long as medium-term inflation expectations are stable or on target, a repeat of the 70s wage hike loop seems unlikely: Despite these historically outsized wage settlements, real wages remain negative and are unlikely to be positive for some time.
For investors and policymakers alike, the question of where to find a neutral interest rate in this new environment will be top of mind as the economic cycle matures. As of today, global economies are yet to see a meaningful easing in their historically tight labor markets. With aging demographics and the re-shoring of certain industrial sectors in Western economies, any return of quantitative easing or negative interest rate policy seems remote for now. More likely, barring an imminent deep recession, we believe significantly higher interest rates compared to the last decade will give fixed-income investors the chance to generate higher income for longer.
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