Most EU states see real pay rise, but UK records a fall

The economic position improved slightly in 2014. However, union negotiators looking for pay increases for their members continued to face difficult conditions in the European Union (EU) in 2014.

Economic growth was weaker than forecast and, although the final figures are not yet available, the latest European Commission estimates, published in November 2014, are that overall growth in the EU states will have been just 1.3% in 2014. This is higher than 2013, when overall the growth rate for the EU was no growth at all, but EU economies are still suffering under the impact of the economic and financial crisis that broke in 2008.

Real pay increased in most EU states

Despite this, the slight economic improvement is also reflected in the pay figures. In 22 out of the 27 EU states, for which figures are available (there are no 2014 pay figures for Luxembourg), pay increased by more than prices. The four countries where real pay fell were Cyprus, Portugal, Ireland and the UK, while in the Netherlands pay and prices both increased by the same amount.

This is an improvement on 2013, when only 15 out of 27 experienced real pay increases, and in in 2012 when there were only 12 countries where pay increased by more than prices. However, the key reason for this improved position was the fall in inflation. With the single exception of Latvia, every state had lower average inflation in 2014 than 2013, and, in 11 countries, prices were actually lower in 2014 than the previous year. Even though pay increases themselves were not that much higher, lower inflation meant that, in most countries, real pay increases were bigger in 2014 than 2013. Less than half, just 13 countries, saw pay go up by more in 2014 than it had a year earlier.

Nevertheless, most of the countries with the biggest increases in real pay are also those with the largest nominal pay growth (growth in money wages). None of the five countries with the largest increases in real pay — of 4.0% or more — are in this position because of sharply falling prices.

Central and Eastern Europe

The three Baltic states which head the list of real pay growth – Latvia (pay after inflation up by 6.5%), Estonia (real pay up by 5.1%) and Lithuania (real pay up by 4.6%) – are among the countries where nominal pay increased most strongly. In Latvia it went up by 7.5%, in Estonia, by 5.0% and in Lithuania by 4.7%.

The same is true of the next two countries, Slovakia (real pay up 4.3%, nominal pay up 4.2%) and Romania (real pay up 4.2%, nominal pay up by 5.3%).

All countries are growing more rapidly than the EU average, although in the case of the Baltic states this growth is a recovery after the steep falls in output they experienced in the early stages of the financial crisis.

It is also striking that these are all countries in Central and Eastern Europe, and this is also the case for most of the other states with large increases in real pay, reflecting the generally higher levels of economic growth in these countries. Poland (real pay and nominal pay both up by 3.5%) and Hungary (real pay up by 3.1% and nominal pay 2.9%) are both countries growing more rapidly than the EU average. Poland’s growth rate is expected to have been 3.0% in 2014, more than twice the 1.3% expected for the EU as a whole, and Hungary is expected to have done even better, growing by 3.2% over the year.

Bulgaria, where real pay increased by 3.7% in 2014, is an exception as it is expected to produce a below average growth performance. However, its relative high increase in real pay owes almost as much to changes in price levels, which fell by 1.4% as to a rise in money wages, which rose by 2.3%, well down on the 8.1% increase in pay recorded in 2013.

The experience of the two remaining Central and Eastern European states that joined the EU in 2004 — the Czech Republic and Slovenia — also indicates that a better than average economic performance does not automatically and immediately translate into above average real pay growth. The Czech Republic’s economy is expected to have grown by 2.5% in 2014. However, real pay increased by only 0.8% in 2014, with a 1.2% increase in nominal wages and a 0.4% increase in prices. Slovenia is expecting a similar level of growth for 2014, but real pay there grew by only 1.1%, with nominal wages going up by 1.3%, while inflation was 0.2%.

Germany

Among the four largest EU economies, Germany performed best in terms of real pay. With a 2.7% rise in nominal pay only partly offset by 0.9% average inflation. Reinhard Bispinck, who monitors pay developments at the WSI, the research institute linked to the German trade union confederation, the DGB, said that “since 2009 the unions have succeeded in pushing through agreed pay increases which have exceeded the then current rate of price rises” – the exception was 2011.

The country’s largest bargaining group, covering 3.7 million metalworkers, was not involved in negotiations in 2014, but the deal signed in 2013 delivered a 2.2% increase in May 2014, more than double the inflation rate, and other deals reached during the year produced similar increases.

Italy

Italy, with a 1.1% increase in real pay, did not do nearly as well. Here, nominal pay increased by 1.3% and prices by 0.2%. One reason for this is many agreements that should have been signed in 2014, have not been. The latest figures from the Italian statistical office, Istat, show that at the end of November 2014, 43.7% of employees in the private sector were waiting for their agreements to be renegotiated. This is well up on the position a year earlier, when only 34.0% of private sector employees were covered by agreements that had expired. The Italian figures are also held down by the public sector, where pay has been frozen since May 2010.

France

Pay in the public sector, or a large part of it, has also been frozen in France since July 2010. However, this does not show up in figures, as they exclude the bulk of the public sector. Despite this, real pay in France increased only by 1.0% in 2014, with a 1.5% increase in nominal pay and a 0.5% increase in prices.

Real pay fell in UK, Cyprus, Ireland and Portugal

However, the UK has the worst record on real pay among the big four economies. It is one of four countries where real pay fell, as prices — measured by the Retail Prices Index — grew more rapidly than in other countries. With 2.4% inflation (averaged over the year) and a 1.4% increase in average weekly earnings earnings (in the three months to October 2014), there was a 1.0% fall in real pay. The LRD’s Payline database of collective agreements showed a median increase of 2.5% in the three months to November 2014, so it seems that collectively bargaining wages may be just about be holding their own. However, the apparently strong economic recovery, with 3.1% growth in 2014, still finds little echo in the pay figures.

In fact, the UK’s real pay performance is close to that of three bail-out countries, Ireland, Portugal and Cyprus, although in all these three both money wages and real pay are still falling. In Cyprus, the worst affected, actual pay was 3.8% lower in the third quarter of 2014 than in the same period a year earlier, and this was only partially offset by the fact that average inflation over the year was also negative, with prices 1.4% lower in 2014 than 2013. In Portugal, pay fell by 1.9% and prices by 0.3%, producing a 1.6% fall in real pay, while in Ireland, pay fell by 0.8% and prices rose by 0.2%, producing a 1.0% real-pay drop.

Greece

Greece, the other main bail-out state, appears to be doing much better, with a real pay increase of 3.4% in 2014. However, falling prices (down by 1.3%) played almost as big a role as pay increases (up by 2.1%). It is also crucial to note that this pay increase comes after a very long period when pay has been falling almost continuously. Pay in the third quarter of 2014 is still 20.7% lower than in the first quarter of 2010 before its financial crisis, without taking inflation into account.

Spain

Spain, another country which has received EU support, although only for its banking sector, banking sector, also now shows a positive figure for real pay. It increased by 0.4% in 2014 compares with a 0.8% decline in 2013. However, this is because of falling inflation rather than rising wages, which are still rising by a measly 0.6% a year.

Spanish unions have warned that the current developments threaten to push the country into deflation – falling prices – with potentially damaging impacts on economic activity and prosperity. They have, therefore, called for higher wages to strengthen domestic demand.

This is also the policy of the German unions. As Bispinck from the WSI points out, “pay negotiations can make a significant contribution to stabilising the economic situation”. With pay negotiations for 3.7 million metalworkers in Germany, just beginning, it will soon become clear whether this call is being heeded.