Eurozone: Wage growth to take longer before improving significantly – RBC CM

Research Team at Danske Bank, notes that the Eurozone’s unemployment rate has reached the lowest level since 2011 and although the rate of 10.2% in April at a first glance seems very high, this is only 0.5pp from the European Commission’s estimate of the structural level.

Key Quotes

“According to our forecast for the actual unemployment rate, the structural level of 9.7% should be reached as soon as Q1 17.

When the structural unemployment rate is reached, upward pressure on wages should – from a theoretical perspective – start to pick-up, but we expect that it will take somewhat longer before wage growth improves significantly. This is because we believe that the structural unemployment rate is likely to be revised lower as it is approached.

Further, the unemployment rate does not reveal the level of slack in the labour market, which is observed in a low participation rate among prime age males and a high share of involuntary part-time employment.

Finally due to the rigidity in wages it might take longer before the indirect impact from the past decline in inflation vanishes. The indirect impact on wages follows from a combination of indexation and weaker nominal wage gaining power under low price increases.”