Wage Dynamics in Europe: Drivers, Institutional Amplifiers, and Policy Spillovers

This paper examines the drivers of wage growth in Europe and assesses whether the 2022–23 inflation surge has altered wage-setting dynamics, using cross-country macro evidence for 26 European economies, agreement-level collective bargaining data for Spain, and estimates of minimum and public sector wage spillovers. We find that the slope of the wage Phillips curve has not materially changed since the pandemic—labor market slack continues exerting a restraining influence on wage growth. However, postpandemic wage growth was higher than predicted by historical relationships, reflecting the outsized inflation shock and a higher sensitivity of wages to past inflation. Wage-setting is found to differ markedly across regions. In Central, Eastern, and Southeastern European Economies (CESEE), wage formation remains more backward-looking, with past inflation playing a dominant role, whereas in Advanced Economies (AEs) inflation expectations are more important. In AEs, the recent wage response followed a sequential pattern: the wage drift rose early as employers granted ad hoc increases, while negotiated wages adjusted with a lag as collective agreements were renewed and workers recouped accumulated real wage losses. Micro evidence from Spain shows that institutional features of collective bargaining conditionally amplify inflation pass-through: CPI indexation clauses, sector-level bargaining, and shorter contract duration are each associated with stronger wage responses to past inflation. In parallel, minimum wage pass-through has strengthened markedly in CESEE since 2015, while public sector wages dampened aggregate wage growth in AEs but amplified it in CESEE during 2022–24. Taken together, these findings suggest that while the core Phillips curve mechanism remains intact, future inflation shocks could generate more persistent wage pressures where wage-setting is more backward-looking, inflation compensation becomes institutionalized (including through indexation that interacts with downward nominal rigidity), or discretionary minimum and public sector wage policies add impetus.