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

IMF Working Papers, June 12, 2026

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

Authors: Kareem Ismail, Ana Lariau, Théodore Renault
Date: June 12, 2026
Coverage: cross-country macro evidence for 26 European economies; agreement-level collective bargaining data for Spain; estimates of minimum and public sector wage spillovers.
Publication: IMF Working Papers, Working Paper No. 2026/120, Issue 120, Volume: 2026, Pages: 71.
Identifiers: DOI: https://doi.org/10.5089/9798229048729.001; ISBN: 9798229048729; ISSN: 1018-5941; Stock No: WPIEA2026120.

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.
Postpandemic wage growth was higher than predicted by historical relationships, reflecting:
- the outsized inflation shock in 2022–23, and
- a higher sensitivity of wages to past inflation.
Regional heterogeneity in wage-setting:
- Central, Eastern, and Southeastern European Economies (CESEE): wage formation remains more backward-looking, with past inflation playing a dominant role.
- Advanced Economies (AEs): inflation expectations are more important in wage-setting.
Sequential wage response observed in AEs:
- Early rise in wage drift as employers granted ad hoc increases.
- Negotiated wages adjusted with a lag as collective agreements were renewed and workers recouped accumulated real wage losses.

Collective bargaining (Spain, agreement-level micro evidence):
- CPI indexation clauses are associated with stronger wage responses to past inflation.
- Sector-level bargaining is associated with stronger wage responses to past inflation.
- Shorter contract duration is associated with stronger wage responses to past inflation.
Minimum wages:
- Minimum wage pass-through has strengthened markedly in CESEE since 2015.
Public sector wages:
- Public sector wages dampened aggregate wage growth in AEs during 2022–24.
- Public sector wages amplified aggregate wage growth in CESEE during 2022–24.

The core Phillips curve mechanism remains intact: labor market slack still restrains wage growth.
However, 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),
- discretionary minimum and public sector wage policies add impetus.
Institutional design of collective bargaining, minimum wage frameworks, and public sector pay policy can materially condition inflation pass-through to wages.

IMF Working Paper: "Wage Dynamics in Europe: Drivers, Institutional Amplifiers, and Policy Spillovers", June 12, 2026.