The prevalence of private sector wage indexation in the euro area and its potential role for the impact of inflation on wages

Shocks to inflation can have longer-lasting effects in the presence of second-round effects. Wage-setting systems are more likely to trigger second-round effects if wage indexation is widespread in labour agreements. To derive a euro area indicator for the prevalence of wage indexation, characteristics of national wage indexation schemes are weighted by country shares in euro area private sector employment. Based on this indicator, around 3% of private sector employees in the euro area have wages and minimum wages automatically indexed to inflation. For most of the employees covered by automatic wage indexation, the inflation measure is backward-looking and includes energy. Indexation regimes where inflation has a formal, but not automatic role in wage negotiations, apply to currently around 18% of employees in the euro area and mostly consider forward-looking inflation measures excluding energy. Additionally, around 18% of euro area employees work in countries where only the minimum wages are automatically indexed to inflation. These indexation mechanisms are usually backward-looking with inflation measures that include energy. For more than half of the employees in the euro area, inflation does not play a formal role in wage setting but can be an important factor in wage negotiations. Where there is no formal role for inflation, inflation developments can be more easily disregarded in times of high uncertainty, with the focus being on job security instead, for example. Since the Great Financial Crisis, indexation regimes with a formal role for inflation in wage setting have become somewhat less prevalent in the euro area. Overall, the likelihood of euro area wage-setting schemes triggering second-round effects based on inflation indexation is relatively limited, particularly with regard to energy inflation. Recent hikes in energy inflation can be expected to lead to some automatic wage increases, mainly in minimum wages in some countries, affecting only a small share of private sector employees. However, a broadly based and automatic pass-through to wage growth through wage indexation mechanisms seems rather unlikely. JEL Classification: J3, J30, J38, E31