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

total wage costs non-wage costs

1Q11 +2.6% y/y +2.3% y/y +3.6% y/y
4Q10 +1.5% y/y +1.4% y/y +1.8% y/y
3Q10 +1.0% y/y +0.9% y/y +1.2% y/y
2Q10 +1.6% y/y +1.6% y/y +1.8% y/y
1Q10 +1.8% y/y +1.8% y/y +1.9% y/y
—

PARIS (MNI) – The annual increase in Eurozone labor costs
accelerated sharply in 1Q to +2.6%, boosted by a pick-up in wage costs
and especially employer payroll contributions, Eurostat said Monday.

Most analysts had expected a more moderate annual rise of 2% at
most.

After bottoming out in the middle of last year, labor costs gains
have now recouped over half the slowdown from the previous high of 3.5%
in the spring of 2009, but they are still far below the pre-crisis peak
of 4.3%.

Stronger labor cost increases in 1Q reflected both faster wage
gains, up 2.3% on the year after +1.4% in 4Q, and a spike in non-wage
costs, which include social security contributions and employment taxes,
to a two-year high of 3.6% — double the rise in 4Q.

A pick-up in wage and non-wage costs was seen in all main sectors,
with industry leading the pay gains (+2.6%) and construction leading
non-wage gains (+3.7%).

Among the largest reporting economies, wages rose most in France
(+3.4%) and least in Germany (+2.2%). But higher social security
contributions and increased sick leave boosted German non-wage cost
increases (+5.3%) to the second-fastest in the Eurozone, after Slovakia.

Moderate economic growth and high unemployment in most countries
had argued for more subdued wage increases. Eurozone employment expanded
by roughly 100,000 in 1Q, while the number of people without work
declined by 64,000 to 15.64 million, trimming the jobless rate by 0.1
point to 9.9%.

The PMI polls suggest that hiring in the services has stabilized in
recent months at a lethargic pace (52.0). In line with the slowdown in
industry, factory job gains have lost a little steam since 1Q to a
four-month low in May (54.3). Employers’ outlook for payrolls
deteriorated in all business sectors in May, according to the European
Commission’s survey.

The European Commission expects employment to rise by 0.4% on
average this year and 0.7% next year, enough to trim the jobless rate by
0.1 point and 0.3 point, respectively.

“Given the extent of labor hoarding during the recession, the
outlook remains for rather subdued job growth and potentially persistent
high unemployment at the aggregate level,” the Commission predicted last
month.

The pick-up in wage growth, if confirmed in coming quarters, should
bolster private consumption, which grew by only 0.3% in 1Q and 4Q.

On the other hand, higher labor costs would slow the improvement in
company balance sheets, hit hard during the recession, and could
generate less financial leeway for investment. The 2.2% rebound in labor
productivity last year brought a 0.5% dip in unit labor costs after a
3.9% surge in 2009.

The pick-up in labor cost trends will be monitored with concern by
monetary authorities, who fear that rising food and energy costs could
inflate wage demands and bring second-round inflation effects that might
endanger price stability over the medium term.

The ECB expects employee pay to rise gradually as the labor market
recovers, partly in compensation for higher inflation, especially in
countries were wage indexation exists. Still, pay gains are seen lagging
inflation this year, before a modest recovery in real wages next year.

“Looking ahead, amid improvements in employment, labor productivity
is expected to grow further, but at a more modest pace,” the ECB said
earlier this month.

“This, in combination with a still moderate but gradually
increasing rate of growth in compensation per employee, should
contribute to a slight rebound in unit labor cost growth for euro area
firms,” the central bank estimated. “Labor cost pressures are
nevertheless likely to remain contained in the medium term in the light
of only gradual labor market improvements.”

The OECD’s forecasts from last month foresee average Eurozone pay
gains of 2.3% this year and 2.4% next year. With labor productivity seen
rising by 1.6% and 1.3%, respectively, unit labor costs would be
practically flat this year and creep up 0.6% next year.

Assuming slight smaller pay increases but also less dynamic
productivity gains, the Commission foresees somewhat stronger increases
in unit labor costs of 0.8% this year and 1.2% next year. In real terms,
however, unit labor costs would decline by 0.6% and 0.4%, respectively.

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

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