ZEW - Centre for European Economic Research

08/10/2023 | Press release | Distributed by Public on 08/10/2023 03:01

Enhancing the Amenities of Work in the Face of Real Wage Losses // ZEW Economist Friedhelm Pfeiffer on Falling Real Wage Incomes despite Labour Shortages

ZEW Economist Friedhelm Pfeiffer on Falling Real Wage Incomes despite Labour Shortages

DP Dr. Friedhelm Pfeiffer, Deputy Head of the ZEW Research Unit "Labour Markets and Social Insurance"

Despite economic stagnation, the workforce has expanded by a remarkable 700,000 since 2020. Moreover, real incomes have taken a downward plunge even though the demand for labour surged. Dr. Friedhelm Pfeiffer, deputy head of the "Labour Markets and Social Insurance" Unit at ZEW Mannheim, explores these dynamics, shedding light on potential strategies to enhance the attractiveness of work in the face of persistent real wage losses and the demand for skilled workers during this time of stagflation.

Presently, the labour market witnesses a convergence of several factors that interact in unique ways. The reverberations from the energy price shock triggered by the war in Ukraine still linger, while real economic output is stagnating in the face of persistent high inflation. This in itself causes a dip in firms' demand for labour. At the same time, businesses report ongoing difficulties in finding enough skilled experts capable of managing the green and digital transformation, all while preparing for the impending wave of retirements among the baby boomer generation.

Moreover, real incomes for workers fell by an average of four per cent between 2021 and 2022, and from Q1 2022 to Q1 2023, incomes experienced an additional 2.3 per cent decline, according to the German Federal Statistical Office. Notably, even robust contractual nominal wage increases of 5.6 per cent during the same period have failed to counterbalance the relentless inflationary pressures. In this context, falling real wages in themselves also reduce firms' real labour costs, which leads to a rise in corporate labour demand. In fact, the first quarter of 2023 saw employment figures of about 41.7 million individuals, an increase of 700,000 compared to the same period in 2020, despite the challenges posed by skill shortages and economic stagnation.

Thus, the question emerges: how can the allure of work be improved amidst persistent real wage losses and the demand for skilled workers, all within the backdrop of stagflation? As things stand, bargaining partners in the labour landscape struggle to raise nominal wages sufficiently to offset the impacts of inflation. At this juncture, policymakers and industry leaders have several alternatives to secure the talent pool, of which two will be scrutinised more closely.