Europe's top banker expects job gains to give wages a boost

By PAN PYLAS Markets Associated Press

Wage increases across the 19-country eurozone should start to pick up as a result of a sustained fall in unemployment, Europe's top central banker said Monday.

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In a testimony to European lawmakers in Brussels, European Central Bank President Mario Draghi said there are a number of reasons why wages have not risen markedly despite the region's blossoming economic recovery.

He said there's a possibility that the recent era of low interest rates and too-low inflation may have been "internalized" by wage negotiators, many of whom may also have been focused more on job retention than on securing higher pay. Wage negotiations may have been "backward-looking," Draghi said.

However, he said that these kinds of factors are likely to be "transitory" and the recent "remarkable" increases in employment should start to be seen in nominal wages — in September, unemployment in the eurozone fell to a near nine-year low of 8.9 percent. With spare capacity in the economy diminishing, there should be a pick-up in wages that can help support consumer demand and give consumer prices a boost.

"Underlying inflation pressures are still subdued as labor market slack remains significant," Draghi said. "The improvements in labor markets that we have observed still need time to translate into more dynamic wage growth."

The eurozone' annual inflation rate of 1.4 percent remains below the ECB's target of just below 2 percent and Draghi said it is expected to "temporarily decline towards the turn of the year, mainly owing to a weaker energy component as a result of base effects."

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Of perhaps more concern to policymakers is that core inflation, which strips out volatile items such as energy and food, has trailed the headline rate, with many blaming subdued wage growth in many parts of the eurozone, especially those countries that were at the forefront of the region's debt crisis.

However, there are hopes that wages will start picking up soon as unemployment falls, including in Greece and Spain, the two which saw the biggest increases during the debt crisis.

The eurozone economy is set to post its highest growth rate in ten years. Earlier this month, the European Union upgraded its growth forecast for the eurozone this year to 2.2 percent, which would be the highest rate since 2007.

The scale of the eurozone recovery this year, which is broad-based across countries and sectors, has caught many economists by surprise. At the year's start, many feared that the region, already disturbed by Britain's vote last year to leave the European Union, ongoing concerns over the euro and a slew of key elections, would face a difficult time. Though uncertainty over Brexit remains, the Greek crisis seems contained and populist politicians failed to make the breakthrough many economists feared during those elections, notably in France.

"Our recovery is robust, is resilient and can withstand some of these risks," Draghi said.