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Trends in nominal labour cost growth

When considering nominal labour cost growth in 2004,

the new Member States can be clustered in three broad

groups. A first group, where nominal labour cost growth

was below 4 %, includes Malta and Cyprus. A second

opposite group consists of a number of countries where

nominal labour costs grew stronger than 8 %, and includes

Lithuania, Latvia, Hungary and Slovakia. The third large

group is composed of countries where nominal labour

costs grew between 4 and 7 % (see Graph 11).

The clustering would be only slightly different if the ref-

erence series is labour costs in manufacturing. Manufac-

turing represents a declining share in total economic

activity, but it seems to still set the pace in overall labour

cost growth in many countries. High labour cost growth

in manufacturing is observed in Hungary, Lithuania and

Slovakia.

Assessment of recent labour cost developments

Labour cost growth in the new Member States can be

assessed with respect to four criteria:

• The 2004 observation could be a continuation of a

past trend or a deviation from it.

• The differences in real labour cost growth could

imply a convergence of wage levels, countries with

Graph 10: Annual nominal labour cost growth, EU-15 countries out of euro area

Source: Commission services.

0 2 4 6 8 1999 2000 2001 2002 2003 2004

% change year-on-year

Euro area UK DK SE

higher labour cost growth might catch up with the

labour cost level in the rest of the EU.

• The observed differences in wage growth could be

justified through similar increases in productivity.

• Finally, differences in real unit labour costs could

reflect local market conditions, i.e. declining real

unit labour costs in countries with high unemploy-

ment and rising real unit labour costs in countries

with a tight labour market.

If labour cost growth over the period 2001–03 is com-

pared with labour cost growth in 2004, it is obvious that

in most countries their position in 2004 is a continuation

of the trend in the previous three years (see Graph 12).

The following exceptions should be mentioned. At the

lower end of the spectrum, special cases are Malta,

where labour cost growth in 2004 was a clear decelera-

tion from the average labour cost growth of about 3 % in

2001–03. On the other side of the spectrum, labour cost

growth in Lithuania, Latvia and Slovakia accelerated in

2004, while that in Hungary had already been high in

2001–03 and continued to be so in 2004. Labour cost

growth in Estonia and Slovenia, which had been high in

2001–03, had converged to the lower labour cost growth

in the other EU Member States.

High labour cost growth in the new Member States,

which are endowed with a much lower labour cost level

than the EU-15 Member States, suggests that labour cost

growth could be driven by the process of catching up

with the average EU level. Evidence in favour of conver-

gence, which would show up in an inverse relationship

between labour cost level and labour cost growth is not

strong. For instance, this relationship is neither visible

within the group of the EU-15 nor for the 10 new Mem-

ber States and neither for nominal nor for real labour cost

growth in 2004.

However, some patterns of convergence are visible if

real labour cost growth over the period 2001–04 is

looked at (see Graph 13). For instance, the Baltic coun-

tries had the lowest labour cost level in 2000 and the

highest average real labour cost growth in 2001–04.

Hungary, Slovakia, the Czech Republic and Poland also

formed a relatively coherent group in terms of their

labour cost level in 2000 and average labour cost growth

in 2001–04. Slovenia, Malta and Cyprus have a labour

cost level below the EU-15 average.

Graph 11: Nominal labour cost growth in the EU Member States, 2004

Source: Commission services. – 2 0 2 4 6 8 10 12 14 16 18 20 MT DE NL AT BE IT PT FR LU DK SE CY FI UK ES PL CZ IE EL SI EE HU LT SK LV

% change year-on-year.

Compensation per employee Compensation per hour

L a b o u r c o s t d e v e l o p m e n t s

Graph 12: Nominal labour cost growth in the EU Member States, 2004 and average 2001–03

Source: Commission services.

Graph 13: Labour cost level and labour cost growth in the EU Member States, 2004

Source: Commission services.

UK SE FI SK SI PT PL AT NL MT HU LU LT LV CY IT IE FR ES EL EE DE DK CZ BE 0 2 4 6 8 10 12 14 16 – 2 0 2 4 6 8 10 12 14 16 18

% change year-on-year in 2004

Average % change year-on-year in 2001–03

BE CZ DK DE EE EL ES FR IE IT CY LV LT LU HU MT NL AT PL PT SI SK FI SE UK – 1 0 1 2 3 4 5 6 0 50 100 150 200

Wage level 2000, EU-25 = 100

Real unit labour costs, which adjust wages by labour

productivity, fell in most of the new Member States in

2004 (see Graph 14). High real wage growth was not

a real cause of concern since it was backed up by

equivalent or stronger increases in labour productivity

in most new Member States. For instance, relatively

high wage growth in Estonia, Poland, the Czech

Republic, Malta, Slovenia and Lithuania was more

than offset by high labour productivity growth, leading

to falling real unit labour costs. There are only few

countries where real unit labour cost increased. While

it rose by 1 % in Latvia, it increased by less than 1 %

in Hungary and Slovakia. This measure is, however,

strongly influenced by the pro-cyclical behaviour of

labour productivity.

If labour productivity is adjusted for the cyclical compo-

nent, the broadly favourable picture holds true. How-

ever, high increases in real unit labour costs of about 2 %

are observed in Latvia, Slovakia and Hungary. The latter

case is particularly worrisome because it means a contin-

uation of increasing cyclically-adjusted real unit labour

costs since 2000, only briefly interrupted in 2003. It also

coincides with a 0.5 % reduction in employment in 2004

in this country. Concerning Latvia and Slovakia, the

2004 observation means a cutback of the gains in trend

real unit labour costs registered in 2001–03. In the Czech

Republic, real unit labour costs declined in 2004 after

having risen for several years, representing an encourag-

ing trend reversal.

Table 10

Real unit labour costs — percentage change per annum

1999

2000

2001

2002

2003

2004

2005 (

₎

_04-Q1

_04-Q2

_04-Q3

_04-Q4

Belgium 0.1 – 1.1 2.6 1.1 – 1.1 – 1.9 – 1 : : : : Denmark – 0.1 – 1.3 1.4 0.7 – 0.2 – 0.6 – 0.2 – 0.1 – 1.3 – 0.4 – 0.7 Germany – 0.1 1.2 – 0.1 – 0.7 – 0.5 – 1.8 – 0.2 – 1.9 – 2.3 – 1.8 – 1.4 Greece 0.1 – 1.8 – 2.8 1.6 – 2.6 1.2 0.3 : : : : Spain – 0.7 – 0.5 – 0.7 – 1.1 – 0.5 – 0.9 – 0.8 – 0.1 – 0.3 – 1.3 – 1.6 France 0.4 – 0.1 0.7 0 0.4 – 1.4 – 0.4 – 0.9 – 2.8 : : Ireland – 3.7 – 1.4 – 1 – 3.7 1.4 0.3 – 0.7 : : : : Italy – 0.2 – 0.4 0.4 0.2 0.8 – 0.3 – 0.1 0.6 – 0.6 – 1.6 0.6 Luxembourg – 1.2 – 2.5 6.1 3.1 – 1 – 1.2 – 1.3 : : : : Netherlands 0.2 – 0.8 0.2 2.2 0.8 – 1.2 – 0.8 – 1.4 – 2 – 2.2 – 1.9 Austria – 0.6 – 2 – 0.7 – 0.7 – 0.2 – 0.6 – 1.3 0.6 – 0.6 – 1.6 – 0.9 Portugal 0.3 1.5 1.1 0 0.5 – 0.4 0 : : : : Finland 1.5 – 2.2 2.1 – 0.8 0.5 – 0.4 0.7 0.3 – 1 – 0.1 – 0.8 Sweden – 1.7 4.1 3 – 0.6 – 0.8 – 1.4 – 0.4 – 0.9 – 1.7 – 1.7 – 1.1 United Kingdom : : : : : : : 0.5 – 0.2 – 1 0.4 Cyprus – 0.6 – 4.1 – 3.9 0.8 0.4 – 0.3 – 1 : : : : Czech Republic 0.8 – 0.4 0.2 3.2 0.8 – 2.7 – 1.4 : : : : Estonia 4.8 – 5.6 – 3.4 – 0.3 2.1 – 2.6 – 2.4 1.9 1.1 2.3 – 2.8 Hungary – 4.2 1.2 2.8 – 0.1 – 0.6 0.3 – 1.2 : : : : Latvia – 2.4 – 6.5 – 4.2 – 4 1.7 1.1 – 2.4 4.7 7.1 – 1.8 : Lithuania 5.3 – 8.6 – 5.9 – 1.2 1.7 – 0.5 – 1.1 – 0.9 – 5.1 – 1.5 – 4.3 Malta – 0.6 7.8 6.2 – 1.4 – 2 – 1.2 – 2.2 – 4.2 – 0.9 – 1.6 – 1 Portugal 0.3 1.5 1.1 0 0.5 – 0.4 0 : : : : Slovak Republic : : : : : : : – 2.1 1 0.2 1.1 Slovenia – 2.9 5.1 0.1 – 1.9 – 0.6 – 1.6 – 1.7 : : : :

New Member States (10 countries) – 0.9 – 1 2.4 – 1.4 – 1.9 – 2.1 – 1.1 : : : : European Union (25 countries) – 0.1 0.2 0.6 – 0.4 – 0.3 – 1.1 – 0.4 – 1.1 – 1.9 – 1.7 0.8 Euro area – 0.1 – 0.1 0.1 – 0.2 – 0.1 – 1.2 – 0.5 – 0.8 – 1.8 – 1.5 – 1