Blog post

Chart of the week: Wage stickiness and painful adjustment

This blog entry studies labour cost adjustment in the euro area. We find that wages are sticky and nominal wages rarely fall except in the most severe

Publishing date
29 October 2012

This article studies labour cost adjustment in the euro area. We find that wages are sticky and nominal wages rarely fall except in the most severe crisis circumstances. Second, unit labour cost (ULC) reductions are often associated with significant increases in unemployment. Third, the relative adjustment is forecast to continue and accelerate during 2012/13.  

The European Commission has just published a long report on labour market developments in the EU ( It is found that “wage moderation has prevailed across the EU, with real wages often growing below productivity. Wage dynamics started more clearly reflecting different needs for adjusting labour costs to re-balance external positions, with more moderate growth rates in nominal compensations recorded in countries recording current account deficits.” It seems the Commission thinks that adjustment to external positions is really only starting. In this column, we look at some of the data.

The evolution of compensations per employee had diverged dramatically between euro area countries in the run up to the crisis. While they grew by only 8.9% in Germany during 2000-2008, almost all other countries were above the average with the gap to Germany increasing by 13.7%, 17.6% and 24.0% in Italy, France and Spain. Adjustment to this divergence is proving slow.

Despite the weak economic situation in Southern European countries during the crisis years, wage adjustment in the aggregate statistics has been anemic. When looking at the compensation per employee growth, Italy, Portugal and Spain are only slightly below the euro area average during 2008-2011, while France remains above average. Greece, Ireland, and Estonia in turn have seen a significant drop in wages. In turn, German developments are only slightly above the average now with 5.7%.


Based on the developments of this year so far, the European Commission forecasts a sharp (-8%) adjustment on labour compensations for Greece during this year, moderate ones for Ireland (-0.8%) and Portugal (-3.1%), and no adjustments at all for Spain (0.1%) or Italy (1.5%). In the next graph we can see the evolution of the relative labour compensation of these countries in comparison with the weighted average of the euro area. Overall, the main adjustment in Spain and Portugal is only starting now whereas Italy’s labour compensation has evolved similarly to the euro area average. The effects look stronger in the second graph because the average is deducted. It is important to note that the adjustment is accelerating significantly despite a drop in the average annual compensation growth going from 2.5% per year in the 2000-2008 to 1.8%. So the forecast suggest adjustment despite a significant deterioration of the average conditions.


Despite the weak adjustment in labour compensation, some countries have already managed to regain some of the lost competitiveness by decreasing Unit Labour Costs (ULC). In particular, ULC adjustment has been significant in Ireland with 12.8% decline on total ULC, followed by Estonia with 6.1% and Spain with 2.1%.


So how can significant adjustments in ULC be squared with the weak adjustment in labour compensation? One explanation relates to the increase in unemployment. Figure 3 shows the relation between unemployment and ULC change. Layoffs of less skilled workers and the increased working time and pressure on those who remained employed have led to an increase in the average output per worker. This is not the entire story as the graph explains around 45% percent of the variation.



About the authors

  • Guntram B. Wolff

    Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Public Policy and Economics at the Willy Brandt School of Public Policy. From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

    An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, Business Insider ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and  advisory board of Elcano.

    Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media. 

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