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

total wage costs non-wage costs

2Q11 +3.6% y/y +3.5% y/y +4.5% y/y
1Q11 +2.7% y/y +2.3% y/y +3.5% y/y
4Q10 +1.7% y/y +1.6% y/y +2.0% y/y
3Q10 +1.2% y/y +1.1% y/y +1.5% y/y
2Q10 +1.5% y/y +1.4% y/y +1.9% y/y
—

PARIS (MNI) – The annual increase in Eurozone labor costs
accelerated sharply in 2Q to 3.6%, boosted by a pick-up in wage costs
and especially employer payroll contributions, Eurostat said Friday.

Analysts’ had expected a more moderate annual rise of 2.8% at most.

After slowing markedly during the recession and its aftermath,
labor cost gains have regained most of their previous momentum. The
annual 2Q rise was the largest in two years.

Wage were up 3.5% on the year in 2Q, while non-wage costs, which
include social security contributions and employment taxes, rose 4.5%.

The pick-up in labor costs was led by industry, where the annual
rise jumped from 2.5% in 1Q to 4.5% in 2Q. The rise was more moderate in
the services, from 2.8% to 3.2%, and in construction, from 2.2% to 2.9%.
Annual wage gains in industry (4.5%), which had rebounded fastest from
the recession, far outpaced those in the services (+3.2%) and
construction (2.7%).

The Eurozone trend was driven by Germany, where pay accords have
benefitted from the robust labor market. Wage costs there were up 4.2%
on the year, outpaced only by Austria, Slovenia, Slovakia and Estonia.
Annual wage gains were more moderate in France (+2.5%) and Italy and
Spain (both +2.3%). National data showed that the quarterly rise in
German labor costs was the third highest on record.

Much of the 2Q surge at the Eurozone level was due to base effects.
Quarterly changes obtained from Eurostat showed only mild acceleration
from +1.1% in 1Q to +1.2% in 2Q — still the strongest quarterly rise
since 4Q 2008.

Labor cost increases should peak soon, as future pay accords are
likely to reflect waning economic growth and rising unemployment. This
should dampen labor costs trends once the effects of past pay hikes have
fed through.

Despite the surprisingly robust gain of half a million new Eurozone
jobs in 2Q, the labor market was unable to absorb all new jobseekers.
The number of people without work rose by a net 43,000 to 15.7 million
in 2Q, and July brought a further increase of 61,000. The upward trend
should steepen as the economy loses further steam.

“With the recovery slowing in 2011, the prospects for further
improvements” in the Eurozone labor market “have waned somewhat,” the
European Commission acknowledged this week.

The PMI polls have signaled a gradual slowdown in payroll gains
since spring, with only modest increases in industry and the services in
August. Gains in Germany and France offset further losses in Italy,
Spain and Ireland.

Moderate pay increases will allow for little recovery in private
consumption until inflation eases. On the other hand, a slowdown in
labor costs would help bolster Eurozone producers’ competitive position
in the global economy.

With the recovery of output since the recession, labor productivity
gains have outpaced labor costs, resulting in a decline of unit labor
costs — a key component of firms’ price competitiveness. The annual
decline diminished over the course of last year from -0.7% in 1Q to
-0.3% in 4Q and to -0.2% in 1Q 2011, reflecting both slowing
productivity gains and faster growth in wages and non-wage labor costs,
according to calculations by the ECB.

“Looking ahead, and in line with continued improvements in
employment, labor productivity is expected to grow further, but at a
more modest pace than before,” the central bank reasoned in its latest
Monthly Bulletin.

“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 ECB said.

“Labor cost pressures are nevertheless likely to remain contained
in the medium term in the light of only gradual labor market
improvements.”

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

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