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European Wage Crisis

In the past decade or so the Euro area has seen large dips and rises in its CPI as well as a stagnant wage growth rate for many sectors of its economy. One of the most impacted sectors is manufacturing, as many workers are becoming replaced by technological advancements. Graph 1 shows  a continuous increase in consumer prices of the OECD (Organization for Economic Co-operation and Development) Europe over the past 25 years, while Graph 2 shows a decrease in the growth rate of wages in countries where the Euro is used over the same time period.

Typically, when a rise in inflation occurs and consumer prices increase, wages rise as well. The 'Wage-Price Spiral' is a macroeconomic theory which states that rising wages increases disposable income, which therefore causes the demand for goods and consumer prices to rise as well. Rising prices will then cause greater demand for higher wages, which leads to higher production cost and more upward pressure on prices, creating a conceptual spiral. The trends shown in the graphs previously presented do not follow this theory.

What are some of possible causes to the trends seen in these graphs? Do you think that the existence of the European Union is part of the cause for stagnant wage growth? What is one way that European countries can combat the stagnation and reel in prices? Does this occurrence have more of a positive or negative impact on Europe overall?  

Extra reading: WSJ article

Pranam and Jack

15 thoughts on “European Wage Crisis

  1. yuy20

    Part of the reason why wage growth has been decreasing may be that pay raises have been minimal and the types of jobs that are being created are mostly non-professional jobs. These jobs may be part-time and negatively impacting the growth rate of wages overall. High levels of income inequality can also impact the differences in wage growth. The existence of the EU definitely makes it more difficult to implement policy changes and have all the countries respond; differences in wage levels and unions across countries makes it hard to control everyone that uses the Euro. To combat the slow growth of wages, the EU can focus on monitoring employment and the proportion of temporary to full-time work. This can also help better match skills to jobs and analyze unemployment. The EU needs to find a way to combat slow wage growth in order to balance it with rising consumer prices.

  2. liur20

    The first graph depicts the wage growth rate for manufacturing jobs in the European union and we could see a clear declining since the 1990s. Few of the causes for such decrease in wages are not only the lose of manufacturing jobs in the European union countries to countries with more more comparative advantages but also technology advancements. Less and less products that are produced in the European counties are requiring physical man labor now and this led to the decrease of hourly wages for manufacture jobs in the European union countries. I do not believe the establishment of European union is a direct cause for this decrease of wage, it is globalization and comparative advantages in countries in the manufacturing jobs that causes it. The EU surly makes countries harder to have big policy changes, but definitely not the cause for this wage decrease. I don't believe this would hurt European countries that much because the way of life the European countries are adapting. People don't buy houses, instead they rent houses, so as long as the prices of rent does not rise that much it wouldn't hurt the European county a lot.

  3. hermana20

    I liked the title of this blog post as "European Wage Crisis" as it reminded me of the recent depreciation of the dollar against the Euro. The depreciation of the dollar marks a turning point away from the long-standing U.S. strong-dollar policy. For Europe, a strong Euro could spell disaster as European exports are loosing money, and it now makes sense to export within the EU rather than abroad where less money will be made. Additionally, the European Central Bank has hinted that if the Euro rises too much, and threatens European exports too much, then the bank will take action and ensure that the Euro cannot rise anymore. For America, a stronger Euro and a weaker dollar means that American exports should increase. In the 2nd graph, one thing that strikes the eye is the dramatic drop in the CPI during the 2008-2009 recession proving the fact that it was a global recession and the shocks were felt around the world. This decline in the Euro CPI during the recession is testament to how globalized the modern economy is with economic crisis in one country having worldwide ramifications, and bull markets in one country spreading to others as stock markets across the world climb in unison. What may contribute to the rising CPI in recent months, given the fact that this is a CPI for all items in the Euro area, is the increased demand for gas while many refineries are out. In July, Royal Dutch Shell was forced to close many units in its large Rotterdam refinery after a series of fires, and refineries in Austria have also struggled to stay open while many countries such as Italy and Germany are pursuing lots of new road construction projects which demand gasoline. This increase in the price of gasoline will cause the CPI to rise.

    https://www.ft.com/content/63252af6-75e3-11e7-90c0-90a9d1bc9691?mhq5j=e5

  4. gutierrezcuadras20

    As mentioned, a raise in inflation usually leads to a rise in wages for reasons described in the "Wage-Price Spiral" theory. The attached graphs, however, do not show this correlation and instead show inflation increasing while growth of wages decreasing. The fact that the graph shows this decline in growth since the creation of the Eurozone in the 1990s does seem to lend itself towards the idea that the European Union has partly caused such stagnation. I wouldn't be surprised if such proved true given that the euro is backed by the economies of numerous countries that vary in natural resources, manufacturing, infrastructure, and specialization. Additionally implementing new economic policies to combat the stagnation might prove difficult since you have to consider the economies of so many countries. Strong GDP growth in one European country may be balanced out by a weak GDP growth in another country, which could lead to a trend of stagnation. Nonetheless, one way Europe can combat such stagnation is to possibly focus on improving productivity for long-term economic growth especially as this wage stagnation can have a more negative impact on Europe overall.

  5. lentza20

    The only way that Europe could effectively and permanently make a positive impact on the decreasing wages and levels of unemployment is create a new job sector to combat the decrease in the manufacturing field. As technology increases, and productivity increases with it, it can only be expected that unemployment get bigger while wages get smaller. Thus, in order to stop this from permanently hurting the market and creating a huge wave of discouraged workers is to find a new field to invest in to create jobs for the continent.

  6. motturt20

    The volatile inflation rates displayed would lead one to assume a corresponding volatile pattern in wage growth rates, but one is clearly not present. This does not in any way go against the "wage-price spiral" theory because the stagnant wage rate growth can be explained by other outside factors. Firstly, income inequality in developed economies has been increasing exponentially without an end in sight, with the CEO's of today's fortune 500 companies earning 296 times the median wage rate, compared to 24 times the median in 1973 (https://www.forbes.com/sites/oliviergarret/2017/02/23/how-to-break-out-of-the-stagnant-wage-growth-trap/#14b9f7732bbf). This takes away from growth rates. Additionally, globalization has caused the supply of jobs in developed countries labor markets to decrease, prohibiting aggregate wage growth. Global trends such as these are particularly impactful to lower to middle class workers who have no power to sidestep the direction of the global economy. The European Union is a collection of economies that abide by a collective policy designed to ensure the continued excellence of the participating states. Since the trends causing stagnant wage rates mainly affect developed economies, the states in the EU will therefore be especially affected.

  7. Juliana Kerper

    It does seem that the presence of the European Union could be part of the cause for stagflation. Several causes of stagflation in general are bad public policy (which seems likely given the EU's organization, and how difficult it can be to implement policy changes), continued suffering from the Great Recession (which is seen in the slow recovery of the wage drop graph), and long-term high interest rates. However, more specifically, an article I read points the finger at an overall decrease in trade with Asian countries and a migration crisis that has slowed commercial traffic and other cross-border business. Clearly something else must be factoring in to the EU's economy, since the graphs shown above do not match the theory of the wage-price spiral and adhering to some of the conditions for stagflation, and the examples mentioned in the article are extremely specific. I wonder if we could take a look at what sectors of the economy were impacted specifically (beyond manufacturing) and at the factors behind the rise of prices.

    https://www.nytimes.com/2016/02/05/business/economy/eu-growth-forecast.html

  8. Mac

    The trend of increasing CPI and decreasing growth rate for wages suggests that social and economical classes are being separated more and more from each other. The widening income gap divides the people and makes it difficult for individuals to transcend the economic ladder. As goods and commodities continue to raise prices, fewer people will be able to afford material goods. I think the European Union is not to blame for this. However, the countries in the union are connected economically which could lead to a couple of countries weighing down the entire European Union. I believe the trends described in the post will produce negative effects on the well-being of Europe. Lower wages and higher commodity prices do not fit well together.

  9. the prof

    The graphs look like they are for nominal wages. You can find data on real wages, that would help us to be more precise in our arguments. I haven't looked at FRED but official EU web sites should have such data, as well as the OECD.

  10. hartigank20

    According to the Wage-Price Spiral, rising wages increases disposable income which means demand for goods will increase and prices will rise. Rising prices will then demand for higher wages, causing higher production costs and another upward increase in prices, creating a spiral. The data here shows an increase in prices but a decreases in wages, which is the opposite of the wage-price spiral. An article I found online describes how a decrease in productivity since the 2008/2009 economic crisis is driving these results. The article says that “capital deepening has been virtually absent since 2013.” Since we know that productivity is necessary for long-run growth, this idea is very likely to be true. The article suggests that Europe should develop a minimum wage policy to guarantee a decent living wage to citizens.

    https://www.socialeurope.eu/wont-wages-europe-rise

  11. williamse19

    One thing to note about these assumptions and graphs is that the wage growth is for manufacturing and not all wages. Things like technical developments and outsourcing manufacturing has caused a decrease in demand for these types of employees. When demand decreases, price decreases. This means that the wage that these suppliers (workers) are getting is smaller. I think that the European Union does not really have the jurisdiction to "fix" something like this and it has not affected the decrease in demand. As far as a positive or negative affect, it depends on who you ask. As a whole, is Europe's consumption is mostly service-based as the U.S. is? If so, these manufacturing workers need to learn skills that apply to service sector jobs and schools need to teach these skills as well.

  12. wilkinsonw20

    The manufacturing sector's slow decline can be explained largely by outsourcing, technological advancements as stated above, and lower wages as unemployment fears rise. I do believe the EU is somewhat responsible for this stagnant growth rate as they struggle with what they call the "working poor." This cycle has created a growing fear of unemployment that has lead to less say for workers in how much they earn or work. What is stopping the EU from implementing some form of a wage floor? Other than slightly disrupting the natural flow of the economy, I believe this could be a possible solution that would lead to less poverty.

  13. Nate

    The creation of the European Union could be playing a part in the declining wage growth rate. Certain countries' economies requiring specific policy measures to combat economic stagnation could not receive the reform they need because of the generalized EU policy. This is likely not the most significant reason for the slow-down in growth rates, however. Manufacturing jobs leave more developed countries as they move toward service industry-based economies, like that of the United States. Additionally, technological development and exporting jobs significantly increase the unemployment rate in a country's manufacturing sector. The wage-price spiral theory does not appear to be in effect within Europe, as prices are rising and wages staying the same or falling. In the housing market, prices have risen to absurdly high levels in certain regions of the European Union. A telling sign about the state of the economy could be the strikingly high rates of renters, where in countries like Germany and France only ~50% of people living in homes actually own them.

  14. Lukas Campbell

    The graphs here do not correlate with the "Wage-Price Spiral" theory, but rather an increase in inflation paired with a decrease in wage increases. This trend correlates to the further separation between economic classes. Without any set program for a minimum wage in Europe, productivity will continue to decrease and thus the trend shown in this graph will continue.

  15. blaira19

    While increases of inflation lead to increases in wages known as the Wage-Price spiral theory, the graphs above do not show this correlation. We see that while inflation increases the wages are not increasing along with it. With the creation of the European Union, people thought that there would be a stable economy where all the countries could use the same currency, but because some countries' economies fell through, it is difficult to tell where the wages have stopped to increase. Europe should focus on the long-term economy and how they can grow towards a healthier economy.

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