Real wages were flat MoM in May. Over the past twelve months, they have risen 2.9%, but here, too, the pace of the increase has eased – for the same reason the wage index has lost momentum – but also because inflation has been high in the recent term, peaking at 4.6% in April.

Although real wage growth has slowed in the past two months, it has generally picked up in the recent past, peaking this February at 6.2%, the fastest growth rate since the beginning of 2017. This quicker growth rate is due mainly to the so-called Living Standards agreements, plus subsequent agreements made on similar terms, which have delivered sizeable proportional pay hikes to large groups of workers since spring 2019. The shortening of the work week has also affected measurements.

Real wages rise despite the economic downturn

There is a reasonably strong long-run correlation between developments in private consumption and real wages. That said, the link between the two has broken from time to time, such as during the surge in private consumption during the 2004-2007 boom. That rise in consumption was financed largely with increased household debt rather than real wage growth. By the same token, private consumption contracted far more than real wages did following the 2008 economic crash, when many households were still reeling from the blow dealt them by the collapse. Leveraged private consumption such as that seen during the pre-crisis period has not yet been a problem this time; in fact, most households’ asset position is relatively sound. This strong asset position could provide some genuine support to households that have lost jobs or income during the Corona Crisis.

Since COVID-19 struck, the connection between these two variables has been severed once again, with real wages continuing to rise at a time when private consumption has contracted. Even though private consumption has held its own in most domestic sectors, it contracted by 3.3% in 2020, mostly because of the implosion of consumption abroad and in sectors severely affected by disease prevention measures.

Real wages have therefore withstood the COVID shock, and it is unprecedented that they should rise so strongly in spite of high unemployment and an economic downturn. In our macroeconomic forecast, we project real wage growth at 4% in 2021, just under 2% in 2022, and 1.5% in 2023. As in the recent past, contractual wage rises explain the lion’s share of real wage growth.

A crisis for the “select few”?

As is implied in the discussion above, it is highly unusual for wages to rise in excess of the price level during an economic contraction coupled with high unemployment. In Q1/2021, unemployment rose to 11.3%, far above the jobless rate during the financial crisis a dozen years ago. It has now begun to ease, measuring 9.1% in May, according to the Directorate of Labour (DoL). The number of jobless persons declined in all sectors during the month, but most in sectors related to tourism.

We expect unemployment to taper off rather quickly in coming months, as tourism regains momentum. We think it will remain relatively high in the near future, however, as wage costs are rising rapidly and, in any case, it will take time for tourism and other sectors to regain their footing after the COVID crash. We think it likely that high wage costs will push equilibrium unemployment somewhat above its historical level.

Naturally, increased purchasing power is most welcome to those benefiting from it and to those that have not lost jobs, personal income, or business revenues. But a segment of the labour market has borne the brunt of the downturn, and paving the way for these people to return to work is a worthy goal.