Europe's Wage Rises Are Aiding Recovery But Economies Face Risks

Summary

• Rising wages and higher incomes are boosting Europe's economic recovery, but policymakers may face challenges due to population aging and shrinking workforce.
• Demographics and shorter working weeks mean employers face fierce competition to find qualified workers and must pay more to retain them.
• Structural reforms to increase productivity are becoming critical. Doing so would both lower inflationary labor market pressures and raise longer-term economic growth potential.

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By Chikako Baba, Senior Economist, Emerging Economies Unit, IMF European Department; Ben Park, Research Officer, IMF European Department; Ippei Shibata, Economist, Research Department, IMF; Sebastian Weber, Deputy Division Chief, IMF European Department.

With appropriate policies and improved productivity, Europe can