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Chart of the Day: Eurozone wage growth, pre-crisis

I ran across this chart on the growth in compensation per employee in the eurozone pre-crisis. It comes from the German Institute for Economic Research, the same institution that believes German banks need 127 billion euros of additional capital (Hat tip billyblog).

Notice that 10% ‘internal devaluation’ in Germany took eight years. We are talking now about 20-30% wage and price cuts in Greece and Ireland. How realistic is that?

P.S. – what does this mean for ‘competitiveness’ in Finland and Spain? Update: regardless of the source, I can’t get the numbers for Spain to mesh with the known increase in compensation and labor cost. I find it surprising that these numbers would show a decline.

Eurozone wage growth

Source: Real Wages in Germany: Numerous Years of Decline (PDF), DIW

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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

16 Comments

  1. Diego Méndez says:

    Spain’s loss of competitiness was not due to higher *real* salaries, but higher *nominal* salaries and prices.

    Labour costs did shot up in Spain with no real benefit for the average worker:

    http://krugman.blogs.nytimes.com/2009/03/14/spanish-doldrums/#?wtoeid=growl1_r1_v1

    (And these studies do not even account for the huge increase in real estate prices in a country where every worker bought their own house/flat).

    Similarly, if you want to measure Germany’s devaluation, I think you should take nominal labour costs (not real wages) into account.

    • I am not convinced here. These two charts need to be reconciled. The Spain-Ireland inflation differential does not explain this over 30% differential in per-worker real wage gains. Something else is going on besides inflation.

      • Diego Méndez says:

        OK, this is the way I see it:

        - The Spain-German differential has mainly to do with different inflation rates.

        - The Spain-Greece differential has mainly to do with the fact that Spain created several million new jobs during the bubble, while Greece didn’t. Hence, higher GDP turned into higher employment in Spain and higher wages in Greece.

        - The Spain-Ireland differential may have to do with the fact that Irish GDP was faster. I agree that other factors did have to combine for such a large effect, e.g. overdue higher compensations due to the previous decade’s growth?

        But any way you look at it, you cannot use these data as a proxy for competitiveness.

    • A few other comments here. I looked at the source document at DIW and they appear to be using a harmonised EU-wide inflation number. I also checked Eurostat, where the Krugman numbers come from. This page is good:

      http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Wages_and_labour_costs

      The numbers show pre-tax earnings rising. These aren’t unit labour costs of course. So, either the DIW number for Spain is wrong (it seems that way now) or there was something happening with non-wage compensation or productivity causing Spain’s average employee compensation to dip.

      • Diego Méndez says:

        By the way (sorry for putting so many corrections to your blog, this surely goes against netiquette), the EU harmonized inflation number is different for each country.

        “EU harmonized” only means inflation numbers for each country are comparable since they have been corrected for different methodologies.

        • Understood. These numbers don’t work for me though. I find the Spanish decrease problematic because in no other place do I find this decrease in compensation for Spanish workers. Eurostat, BLS, OECD all say costs (and compensation) were rising as they were in Ireland. I believe this number is erroneous.

          • Diego Méndez says:

            Take a look at Table 1 here:

            http://epp.eurostat.ec.europa.eu/statistics_explained/images/5/5f/Wages_and_labour_costs_12.07.11.xls

            Table 1: Earnings in the business economy (average gross annual earnings full-time employees) [for companies over 10 employees]

            You will see German “wages” in that category grew by 20% (i.e. stagnated if deflated with German inflation), Spanish “wages” grew by 44% (i.e. stagnated when deflated by Spanish inflation) and Greek “wages” grew by a wonderfully high 76% in the 2000-2008 period, which is some 30% more than Spain and Germany, which is consistent with DIW’s data.

            Now take into account differing developments in Social Security charges (e.g. Merkel’s financing Social Security through VAT, hence statistically reducing employee compensation, which includes Social Security charges) and differing developments for self-employed and very small companies (which had even lower productivity growth in Spain). I’d say DIW’s picture is pretty consistent with other data.

          • I still don’t buy it. I have to run the numbers. The red herring for me is the marked differential in Ireland and Spain in 2000-2008 wage growth when their unit labor cost growth was in line (34.7% Ireland compared to 27.2% Spain). Either productivity gain differentials were off the charts high or inflation differentials were off the chart high. I don’t believe the productivity differential was that great and Inflation in Spain just was not that much higher. So, no this picture does not make sense.

          • See these charts here starting on page 19. This makes sense.

            http://www.ecb.int/pub/pdf/scpops/ecbocp90.pdf

            For 1999-2006, nominal wage growth versus the average in Germany, Spain and Ireland was -1.2%, +0.5% and +3.6%. That means that wage growth in Germany was negative while it was anaemic in Spain in nominal terms. (Table 3)

            When you look at the same figures in real terms, you get -0.5%, -0.8% and +1.9%. That means that real wage growth in Spain (according to the ECB) was even worse than it was for Germany over that period. (Table 5)

            Only when you combine this with low relative productivity growth do you get the higher unit labor costs from Krugman’s numbers.

            So the answer is

            1. Lower nominal wage growth
            2. Higher inflation
            3. Low productivity growth

          • Diego Méndez says:

            I don’t have the time to look for the numbers, but productivity *decreased* in Spain during the bubble times, while Irish productivity skyrocketed.

            Now, it’s obvious those Irish productivity numbers were far less miraculous (and Irish wages far less sustainable) than we first thought.

            So, again, unit labour costs and real wages are pretty different things!

          • Decreased productivity would mean even HIGHER unit labor cost growth in Spain than Ireland given the high wage gains in Spain. What you’re saying doesn’t mesh with the numbers.

          • The bottom line is that you started talking about inflation explaining why Spanish wages had fallen. I said the inflation differential to Ireland could not explain this and it does not.

          • Diego Méndez says:

            Ed,

            I am probably wrong, but let me explain myself:

            1) you had large nominal wage increases in both Ireland and Spain;

            2) you had large price increases in both Ireland and Spain;

            Than you ask: why did Spanish real wages decrease while the Irish skyrocketed?

            And my answer is: because Spanish productivity *decreased* while the Irish *skyrocketed*.

            As I see it, there is no inconsistency here. If Irish wage increases were larger (which I haven’t checked) but Spanish productivity decreased, you could have similar ULC increases in Ireland and Spain (such as the figures you quote) while having negative real wage growth in Spain and strongly positive real wage growth in Ireland.

            I still can’t see why DIW would be wrong nor why real wages have much to do with competitiveness.

  2. Coldcall says:

    wait a minute here. In Andalucia the average wage is 1000 euros per month, thats for everyday jobs like waiters etc…they are called “mil euroistas”.

    So wages have increased a little from the days of the peseta because 120,000 per month was an average wage back then for a waiter. But 1000 euros no way buys what 120,000 euros use to buy. They dont need wage delation in Spain, other than the overpaid public sector functionaries who probably earn closer to 1500 euros-2000 euros. Maybe they are earning more money, but this wage inflation certainly has not happened for the majority.

    So this idea that Spain must defalte both wages and prices is wrong and misses the imbalance.

    The real rate of inflation since Spain joined the euro is 100%. the rate of wage inflation 10%. So how did they make the Spanish think they were better off with the euro? Well lots of cheap credit of course!

    The euro was a total stich up.

  3. Diego Méndez says:

    OK, thanks for your 15:32 comment. That explains it all and I agree.

    • Good to hunt that down. Might help put things into perspective regarding the relative solutions to problems i.e. in Spain it’s not about suppressing wages at all but raising productivity.