Europe's Chances for a Wage Boom Look Slim -- The Outlook

European Central Bank officials are watching wage growth as they plot a gradual retreat from the easy money policies they've employed in recent years to boost the regional economy. But the pickup they're looking for as a signal that Europe is returning to full health might not materialize.

Last month, ECB economists cut their 2017 forecast for regional wage growth to 1.5% from 1.7%, after a paltry 1.2% increase in 2016. Germany is enjoying gains, but its neighbors lag far behind, including wage growth of less than 1% in Spain and Italy.

Hidden economic slack and long-run trends could stymie wages across the whole region in the months ahead.

Workers face competition from lower-cost economies and technological innovations threaten to replace workers with robots. That's holding down wages across a range of developed economies, including the U.S. This is exacerbated in Europe by the shifting nature of wage-bargaining and a focus at labor unions on winning more flexible work hours and job security rather than pay raises.

Eurozone policy makers have promoted a push away from collective wage bargaining. In the name of better worker productivity, they want to nudge the eurozone closer to the model common in the U.S. and the U.K., where pay is set at the level of the company or the individual, rather than across whole sectors.

The process began in Germany, which was mocked as the 'sick man of Europe' in the early 2000s. The country embarked on a series of labor market overhauls, which facilitated an expansion in temporary work and reduced labor union coverage.

It has since spread through Spain, Italy and -- more recently -- France, where President Emmanuel Macron has put an ambitious labor overhaul at the center of his political agenda. It could pay off in the form of lower unemployment and greater productivity in the long run. In the short run, however, the push has made workers reluctant to demand big pay raises.

German workers are reaping some of the benefits of change now, in part because unemployment, at 3.6% of the labor force, is so low. German wages were 2.9% higher in the second quarter from a year earlier. Still, even in Germany that's less than the 3.5% gains seen in the 1980s and 1990s.

Official data show many of the new jobs created in the eurozone are part-time, leaving many people working fewer hours than they would like, and thus less bargaining power. Even in Germany, about 5.4 million people still want a job or wish to work longer hours, Germany's statistics body says.

Slack in the labor market is especially large in Southern Europe, according to the Organization for Economic Cooperation and Development. In Spain, the rate of labor underutilization is close to 30%. In Italy, it is 27%, compared with 9% in the U.S. In addition to those who are unemployed, the underutilization rate includes those who want to work but haven't recently looked for a job, and those who are working fewer hours than they would like.

Moreover, many eurozone workers are on temporary contracts that economists say typically attract lower pay and smaller pay rises than full-time alternatives.

According to calculations by Marchel Alexandrovich, an economist at Jefferies International, more than half of the 1.5 million new jobs created in Spain since the start of 2014 are temporary. The proportion is even greater in Italy, he said, where a total of 592,000 new jobs were created over the same period.

"In a best-case scenario, these jobs will end up being converted into permanent employment," Mr. Alexandrovich said. "It's also possible that they may not, which means that for any given level of employment, job insecurity is higher."

Apart from Germany's hypercompetitive export industries, many of the new jobs created in recent years are in low-productivity sectors that tend not to produce much wage growth, such as elderly care and helping to integrate recently arrived migrants. For people who work for Germany's government, pay rises are constrained by its insistence on balancing its budget to prepare for higher pension and health care costs in the future.

An early indication of the wage outlook comes Thursday -- the same day the ECB is expected to announce it will scale back its bond-purchase programs -- when Germany's powerful IG Metall labor union is due to deliver its final pay claim for 2018.

The labor union, Europe's largest by membership, is seeking a pay rise of 6% for a period of 12 months for the roughly 3.9 million workers in the metals and electrical industries, which, if successful, would mark the largest increase since 1991. But in past rounds, Germany's metals workers have settled for about half of what they demanded.

This time, IG Metall has other priorities, which are likely to limit the agreed rise in wages. That includes safeguarding jobs against threats from globalization and technological change. It also includes a demand that workers should be able to temporarily reduce their labor time to 28 hours a week for up to two years.

"We want a work schedule that suits workers' way of life," said Jörg Hofmann, who heads the IG Metall union.

That isn't a recipe for a big pay rise.

Write to Paul Hannon at paul.hannon@wsj.com and Nina Adam at nina.adam@wsj.com

(END) Dow Jones Newswires

October 22, 2017 12:14 ET (16:14 GMT)