EU says lower unemployment may fuel wages, inflation

Mar 29 | Updated: Mar 30 2007, 06:05am hrs
The European Commission said faster hiring in the euro area may boost wage demands by workers and push up inflation, echoing central bankers who have indicated they see a need to increase interest rates further.

Real wage increases could go beyond productivity increases and therefore have an upward effect on prices, the commission, the European Unions executive arm, said in a quarterly report on the economy released on Thursday in Brussels. Europes unemployment rate is at a record low as companies including Frances Vinci SA and Merck KGaA of Germany add workers. While the improved labour market is lifting consumer confidence, the European Central Bank is concerned it will fuel higher wage demands by labor unions and fan inflation.

The Frankfurt-based ECB on March 8 raised its benchmark rate for the seventh time since late 2005, to 3.75%, and left the door open for further moves. ECB President Jean-Claude Trichet on Wednesday said inflation risks remain on the upside, as economic expansion fuels wage demands and money-supply growth stays dynamic.

Pay talks in Germany, Europes largest economy, resumed this week for more than 8 million workers in the construction, engineering and retail sectors.

The IG Metall labour union, Germanys biggest, representing workers at companies including Volkswagen AG and Thyssen-Krupp AG, is seeking a pay rise of 6.5%. It rejected an offer of 2.5% plus a one-off payment worth 0.5% on March 27. We are in the middle of big wage negotiations. It makes sense for the ECB to warn those involved to be more restrained in their demands, said Sandra Petcov, an economist at Lehman Brothers International in London. Still, she expects wage growth to remain relatively muted.