Analysis of wage growth in the Czech Republic

MONETARY POLICY REPORT | SPRING 2023 (box 1)
(authors: Kamil Galuščák, Barbara Livorová, Adam Ruschka)

Nominal wage growth has surged along with the high inflation in the Czech Republic in recent months, despite firms’ increased costs associated with the energy crisis. Real wage growth has meanwhile fallen sharply and remains highly negative. This box examines nominal wage growth in the Czech Republic in terms of its distribution and persistence, aiming to analyse in detail the current situation and any future implications.

Year-on-year wage growth has been increasing almost continuously since the end of the Covid pandemic, i.e. since 2021 Q4, and has been doing so to a similar extent in firms across the entire domestic economy. The broad surge in wage growth is evident from a shift of the entire wage growth distribution to higher levels (see Chart 1), particularly between 2021 and 2022.[1] The broad nature of this growth indicates persisting demand for labour among firms, which are in quite good financial shape. Although companies are not fully compensating households for the loss in real purchasing power caused by the high inflation, they are at least partly ceding to their employees’ demands. Firms’ behaviour does not differ substantially according to their size.

Chart 1 – The wage growth distribution in firms is shifting to higher levels
x-axis: year-on-year nominal wage growth in market sectors in %; 
y-axis: probability density; source: statement P2-04 (CZSO); CNB calculation

Chart 1 – The wage growth distribution in firms is shifting to higher levels

The broad nature of the wage growth is also evidenced by the contributions of individual sectors to the total wage growth (see Chart 2). This perspective shows that wage growth has returned to its pre-pandemic pace in terms of both level and structure, with all the main sectors contributing. Market services and industry are making the largest contributions due to their weight in the economy. According to the latest information on wage growth in industry and construction dating from the start of this year, nominal wage growth can be expected to stay high.[2]

Chart 2 – The post-pandemic wage growth recovery is being driven by high-weight market services and industry, but the growth is broad-based
year-on-year nominal wage growth in %; contributions in pp

Chart 2 – The post-pandemic wage growth recovery is being driven by high-weight market services and industry, but the growth is broad-based

Continued high wage growth is suggested by reports on the results of collective bargaining in large car companies and retail chains. The sustained high – albeit recently significantly declining – number of job vacancies and the related efforts of firms to fill these positions even at the cost of rising personnel costs speak in favour of higher wage growth. These labour market conditions are strengthening employees’ bargaining position.[3]

The high persistence of wage growth is evidenced by an analysis of structural breaks in the time series of year-on-year wage growth in market sectors (see Chart 3).[4] While the global financial crisis of 2008–2009 caused wage growth to slow significantly, the subsequent switch of the labour market to an overheated state in 2016 was again accompanied by faster wage growth. The Covid pandemic caused only short-term volatility due largely to statistical effects, but it did not cool wage growth. Nor did wage growth slacken in the period of high inflation and subdued economic growth last year.

Chart 3 – Neither the pandemic nor the subsequent stagflation caused a major break in wage growth
year-on-year nominal wage growth in %

Chart 3 – Neither the pandemic nor the subsequent stagflation caused a major break in wage growth

Continued wage growth is suggested by employers’ willingness to raise employees’ wages, as expressed by the share of firms making quarter on-quarter wage increases (see Chart 4).[5] This reveals that firms raised their employees’ pay even in the midst of the energy crisis. The said share is now equal to the historical high recorded in 2016–2018. From the sectoral perspective, the situation in industry differs little from that in market services. Lower levels of this indicator were observed for a long time after the Global Financial Crisis. This also corresponds to the periods of structural breaks in wage growth.

Chart 4 – Willingness to raise wages is at pre-Covid levels
proportion of firms raising wages quarter on quarter; weighted by size of firm according to number of employees; source: statements P3-04 and P2-04 (CZSO); CNB calculation (seasonally adjusted)

Chart 4 – Willingness to raise wages is at pre-Covid levels

The hypothesis of significant wage persistence is supported by a breakdown of wage growth using the wage Phillips curve (see Chart 5). It shows that past wage growth has a dominant effect on the current and future level of wages.[6] The role of households’ inflation expectations intensifies at times of high inflation. Judging from this breakdown, the high inflation in the recent past seems to have been a very significant factor boosting year-on-year wage growth during 2022.

Chart 5 – The resilience and persistence of wage growth have long been high
annual nominal wage growth in %; contributions in pp

Chart 5 – The resilience and persistence of wage growth have long been high

Another view of the current wage growth is provided by the annual moving average of the quarter-on-quarter changes in wages, which proxies for the persistent component of wage growth. If we relate the annual moving average in a given quarter to the annual moving average in the same quarter of the previous year, we obtain an indicator of wage growth momentum. From this perspective, too, last year’s wage growth is at historical highs (see Chart 6) (abstracting from the volatility in 2014, which was caused by statistical factors[7]).

Chart 6 – Wage momentum is currently high
quarterly growth in %; market sectors

Chart 6 – Wage momentum is currently high

A risk of pronounced growth in future wage pressures is also indicated by the current trend-cycle decomposition of the real wage (see Chart 7). The historical deviations from the steady-state level of real wage growth match the overall picture of the labour market and inflation. The pre-Covid period of an overheating economy, with real wages rising substantially faster than labour productivity, is clearly visible. The real wage is currently declining sharply. The identification of this decline as cyclical in nature indicates that, in the future, the real wage will return to its steady-state level either through a decline in inflation or through a further increase in nominal wage growth, or a combination of the two. This would offset the currently significant positive gap between labour productivity growth and real wage growth. An increase in the real volume of wages would simultaneously boost household consumption.

Chart 7 – The trend is reversing after a sharp fall in the real wage
year-on-year growth in %; contributions in pp

Chart 7 – The trend is reversing after a sharp fall in the real wage

To conclude, the labour market has long been overheated and did not cool down sufficiently either during the pandemic or in the subsequent stagflation episode. Our analysis reveals that the current wage growth is broad-based and relatively persistent. A quick and significant moderation in the near future is therefore unlikely, as other (non-wage) costs will decline due to the gradual stabilisation of the energy, commodities and materials markets.


[1] According to statement P2-04, in 2021 Q4, wage growth in market sectors averaged 6.1% with a standard deviation of 18.9%. In 2022 Q4, it averaged 8.3% with a standard deviation of 13.7%.

[2] Year-on-year wage growth of 11.9% and 10.8% in industry and 14.9% and 14.1% in construction was reported in January and February 2023 respectively.

[3] Collective bargaining is decentralised in the Czech Republic and the coverage of employees by collective agreements is low relative to other EU countries at around 30%. For details, see Moving with the times: Emerging practices and provisions in collective bargaining (external link), Ricardo Rodriguez Contreras, Oscar Molina (2022), Eurofound.

[4] Structural breaks were identified and tested using the Chow test.

[5] Data for non-financial private corporations with 50 or more employees. The chosen methodology was used, for example, in the blog post Recent trends in individual wage growth (external link), Maximiliano A. Dvorkin, Maggie Isaacson (2022), Federal Reserve Bank of St. Louis.

[6] The effect of persistence is probably higher in the Czech Republic than in the USA. See, for example, Wage growth when inflation is high (external link), Oscar Jorda, Celeste Liu, Fernanda Nechio, Fabián Rivera-Reyes (2022), Federal Reserve Bank of San Francisco.

[7] Significant changes in the wage trajectory caused probably by tax changes in 2013 (external link).