European companies dealing with the most alarming energy crisis and inflation in four decades are bracing for a fresh shock: wage inflation and the increasing threat of worker actions. The theme has emerged this earnings season, with many of Europe’s most prominent companies warning that prices may rise further in 2023 amid tough wage negotiations in a tight labor market. A season of strike action is already in full swing across Europe as workers – who now suffer the most dramatic real income decline in years – push for higher pay.

With productivity almost flat and a number of countries in the euro area, as well as Britain, entering recession, the wage demands could put additional pressure on company’s bottom lines. “We’re watching this very closely,” Nestlé SA chief Executive Officer told Bloomberg Television. “In most industrial European countries those negotiations for ’23 will unfold during the winter and first quarter.”

Some companies are already dealing with walkouts. For example, in November 2022, as red banners and whistling filled the air, Airbus SE employees marched out of an assembly plant in Bremen, Germany, in a bid to secure an 8% pay rise. Negotiating on behalf of 3.9 million manufacturing workers, IG Metall (Germany’s most powerful workers’ union) argued that wage hikes were needed to meet rising energy bills. In response, the employers’ association has insisted there simply won’t be extra profits to pass down the line, since “there will be no growth that can be distributed”. Yet, Germany’s recent decision to hike the minimum wage by 22% could encourage unions while feeding broader inflation.

With inflation still rising, there’s more pressure than ever on companies to reduce their spending. But holding down wages can backfire, and the next several months will show whether pay is one cost that companies can’t afford to cut.

(Dasha Afanasieva et alii. Europe’s Wageflation hangover. Bloomberg Businessweek, 14.11.2022. Adaptado)