Increasing labour supply has helped keep wage pressures contained despite strong employment growth and low unemployment, according to the European Commission’s Autumn 2019 Economic Forecast.
However, as a result of the tighter labour market, wage pressures are expected to strengthen and lead to higher growth in compensation per employee.
The report said that unemployment is projected to remain low at around 4 per cent in the next two years. Employment growth is expected to remain strong, but to moderate over the forecast horizon as economic growth eases, the report said.
Growth in unit labour costs is projected to rise to 1.9 per cent in 2018 and to remain broadly stable over the forecast horizon.
The report also observed that headline inflation began to accelerate in the second quarter of 2018, following a period of moderate price pressures, partly reflecting an increase in the weight of accommodation services in the price index, as well as the rise in international oil prices.
Inflation is set to progressively rise over the forecast horizon on the back of wage growth, and should reach around 2 per cent in 2020.