Real wage catch-up in the euro area

Prepared by Colm Bates, Katalin Bodnár, Vasco Botelho and Flavie Rousseau

Published as part of the ECB Economic Bulletin, Issue 5/2025.

Real wages in the euro area have largely recovered from their decline during the period of high inflation in 2022. Nominal wages have recently risen faster than prices. As a result, real wages, which are measured by deflating nominal wages by cost-of-living indicators, are now approaching levels seen before the inflation surge. For example, in the first quarter of 2025, compensation per employee deflated by the Harmonised Index of Consumer Prices (HICP) was only around 0.5% below its level in the fourth quarter of 2021 – at the start of the inflation surge – while in the fourth quarter of 2022 it had dropped 5% below that level (Chart A, panel a). Other wage indicators deflated by the HICP or the private consumption deflator show similar catch-up trends. The recent gradual restoration of lost purchasing power should limit wage demands in the future. However, workers may still perceive a loss in living standards. For instance, they would have continued to perceive a considerable real wage gap in the first quarter of 2025 if they had compared their nominal wages with the prices of frequent out-of-pocket purchases (FROOPP) augmented with HICP energy prices rather than with the overall HICP.^[1]

Chart A

Wage indicators for the euro area

a) Real consumer wages

(index: Q4 2021 = 100)

b) Real producer wages

(index: Q4 2021 = 100)

The nature of inflationary pressures in recent years has driven a wedge between “real consumer wages” and “real producer wages”. For workers, wages are an income factor that contributes to their wellbeing. For employers, however, wages represent a cost factor that is traditionally closely linked to developments in labour productivity.^[2] From their perspective, the relevant real wage measure is calculated relative to the prices that they can charge to produce their goods and services, which are accounted for by the GDP deflator, total supply deflator or sectoral value-added deflators.^[3] When defined in this way, real producer wages have already surpassed their levels prior to the inflation surge (Chart A, panel b).^[4] The differences in how real consumer and producer wages have developed largely reflect the fact that higher energy prices and supply chain disruptions pushed up import prices, leading to a deterioration in the terms of trade.^[5]

At the sectoral level, real wages have surpassed their levels prior to the inflation surge in market services, but still have some ground to make up in both the industry and construction sector and the public services sector (Chart B, panel a). Inflation affects all workers in similar ways, irrespective of their jobs. Nominal wages have not increased by the same amount or at the same pace in all sectors. In the first quarter of 2025 the real wage catch-up in the market services sector was complete, while real consumer wages were still lagging in both the industry and construction sector and the public services sector. Real producer wages show the extent to which wage costs increased relative to the prices charged by firms in each sector. Employers in market services were less affected by the energy shock and benefited the most from reopening effects following the COVID-19 pandemic, experiencing higher labour shortages as a result, which supported wage growth overall. Real producer wages also increased in public services, with wages weighing more on the sector’s costs than in the past. By contrast, employers in the industry and construction sector – a capital-intensive sector that is more exposed to higher energy costs – bore the brunt of the inflation shock. As a result, while real consumer wages in industry and construction have displayed similar dynamics to those in public services, real producer wages are still far below the levels recorded in the fourth quarter of 2021.

Real consumer wages have fully returned to or even exceeded their levels prior to the inflation surge in several euro area countries, while they continue to lag in others (Chart B, panel b). This reflects a combination of factors: (i) structural issues, which have translated into a pattern of real wage losses in some countries over a longer time period; (ii) a high degree of variation in inflation rates during the high-inflation period; and (iii) differences in the speed and structure of wage-setting and the associated negotiations across countries.^[6]

Chart B

Real wage catch-up in the first quarter of 2025: differences across sectors and countries

a) Across sectors

(percentages, cumulative change compared with the fourth quarter of 2021)

b) Across countries

(percentages, cumulative change compared with the fourth quarter of 2021)

Survey evidence shows that consumers continue to have mixed perceptions of real wage catch-up, despite some improvements. Real wage developments based on aggregate macroeconomic indicators may not fully reflect consumers’ perceptions of their real wages. In the second quarter of 2024, annual compensation per employee growth exceeded consumers’ inflation perceptions, as recorded in the ECB Consumer Expectations Survey (CES), for the first time since the 2022 inflation surge (Chart C). Some moderation notwithstanding, there was still a positive gap in the first quarter of 2025. Consumers’ perceptions of real wage catch-up have implications for their confidence and consumption decisions. Baumann et al. (2025) find that a large proportion of consumers perceive that their nominal wage growth has not exceeded price growth in the previous 12 months, based on the CES. In April 2025 the CES repeated the same set of questions regarding real wage catch-up, and the results remained unchanged: a still significant proportion of consumers felt that their wage growth had not outstripped price growth.^[7] This suggests that consumers tend to focus on alternative consumption baskets and that sharp price changes may continue to be reflected in their perceptions over a longer period. A sustained catch-up of real wages together with price stability is therefore likely to promote consumer confidence and underscore growth in the euro area. The evidence presented in this box confirms that, overall, the choice of price index matters when assessing real wage catch-up. As highlighted, there is a difference between consumer prices and the prices charged by domestic firms. But even when the results focus more narrowly on the purchasing power of consumers, different consumption baskets still have significant implications for consumers’ perceptions of their real wages.

Chart C

Real wage growth when deflated by consumers’ inflation perceptions

(annual percentage changes)

References

Allayioti, A. and Beschin, A. (2024), “The dynamics of inflation differentials in the euro area”, Economic Bulletin, Issue 5, ECB.

Arce, Ó., Hahn, E. and Koester, G. (2023), “How tit-for-tat inflation can make everyone poorer”, The ECB Blog, ECB, 30 March.

Arce, Ó. and Sondermann, D. (2024), “Low for long? Reasons for the recent decline in productivity”, The ECB Blog, ECB, 6 May.

Bates, C., Bodnár, K., Healy, P. and Roca I Llevadot, M. (2025), “Wage developments during and after the high inflation period”, Economic Bulletin, Issue 1, ECB.

Bates, C., Botelho, V., Holton, S., Roca I Llevadot, M. and Stanislao, M. (2024), “The ECB wage tracker: your guide to euro area wage developments”, The ECB Blog, ECB, 18 December.

Baumann, A., Caprari, L., Kocharkov, G. and Kouvavas, O. (2025), “Are real incomes increasing or not? Household perceptions and their role for consumption”, Economic Bulletin, Issue 1, ECB.

Bodnár K., Gonçalves, E., Górnicka, L., and Koester, G. (2022), “Wage developments and their determinants since the start of the pandemic”, Economic Bulletin, Issue 8, ECB.

Consolo, A. and Foroni, C. (2024), “Drivers of employment growth in the euro area after the pandemic – a model-based perspective”, Economic Bulletin, Issue 4, ECB.

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