Eurozone nominal hourly labour costs, workday-adjusted y/y:

total wage costs non-wage costs

2Q10 +1.6% +1.5% +2.0%
1Q10 +1.9% (+2.1%) +1.8% (+2.0%) +2.2% (+2.1%)
4Q09 +2.0% (+1.7%) +1.8% (+1.6%) +2.6% (+2.0%)
3Q09 +2.9% (+2.6%) +2.8% (+2.7%) +3.0% (+2.6%)
2Q09 +3.5% (+3.3%) +3.3% (+3.2%) +3.8% (+3.4%)
—

PARIS (MNI) – The annual rise in Eurozone labor costs slowed
markedly in 2Q to +1.6%, the smallest increase since the start of the
series in 2000, from +1.9% in 1Q, Eurostat said Tuesday.

The slowdown reflected mainly weaker wage gains, which rose 1.5% on
the year, down from +1.8% in 1Q and +3.3% a year earlier. Non-wage
costs, which include social security contributions and employment taxes,
were 2.0% higher on the year after +2.2% in 1Q.

Annual labor cost gains in industry slowed to 1.1% in 2Q from 1.6%
in 1Q, in construction to 1.7% from 2.5%, and in the services to 1.9%
from 2.0%.

The slowdown in wage gains is likely to continue, as activity is
still too anemic to prompt much new hiring, especially since some firms
have labor reserves as a result of public subsidies that encouraged
labor hording during the recession.

The IMF expects Eurozone employment to decline by 1.1% this year
and another 0.2% next year, boosting the jobless rate to 10.4% in 2011.

Sluggish wage growth is a double-edged sword for the economy. On
the one hand, as production recovers with the labor force on hand, firms
will profit from falling unit labor costs after the surge of nearly 8%
during the last two years. This will ease the squeeze on balance sheets,
generating financial leeway for investment.

Falling unit labor costs will also encourage the European Central
Bank to hold off on interest rate hikes longer. “The remaining slack in
the economy and weak labor market conditions are expected to keep core
inflation at historically low levels,” the European Commission said
Monday.

On the other hand, sluggish wage gains in period of rising food and
energy costs will weigh on household budgets and consumer demand for
goods and services.

The OECD expects the rise in employee compensation to slow from
2.6% in 2008 to 1.1% this year and pick up to 1.5% next year. With
inflation projected at 1.5% and 1.0% this year and next, real earnings
would be virtually flat through next year.

Labor costs in the first half of this year rose at the slowest pace
on record since 1991, the ECB noted in its latest monthly bulletin.

“Looking ahead, it is likely that the annual rate of growth in
negotiated wages will continue to be low in the coming quarters and even
possibly decrease further, as new contracts entail only modest wage
increases in both the private and public sector,” the central bank said.

–Paris newsroom +331 42 71 55 40; e-mail: stephen@marketnews.com

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