What does inflation do to labour costs?


Limited impact due to National Labour contract

Barclays macro team has written about how inflation affects wages in the Euro area (for example Euro area wages: Picking up (a little) dated 23-02-22, Euro Themes: Tracking the rebound of negotiated wages – Italy dated 19-01-22). Here we look at Italy only, and in particular at how the National Labour contract rules wages in the banking sector. The current agreement expires in Dec-22 and, according to Barclays macro team estimates, it envisages a c.1% YoY step up in the wages, from Jan-23 (Barclays tracker in Figure 1). Normally negotiations can take 6-12 months (although there have been longer windows, of up to 2 years) and then a new contract is signed. So, the current levels of inflation are unlikely to influence the Italian banks’ payroll costs in the near term, either directly, or indirectly. However, of course, especially if inflation does not normalize, it can be reflected into the new National Labour contract negotiation.

Barclays Macro team: A regression model to assess the pass through of the Banks Labour contract step-up to staff costs

Based on a simple regression analysis linking negotiated wage growth per employee to actual wage growth per employee, we estimate that for every 1ppt step-up in negotiated wages, sectoral wages have historically only increased by c. 0.7ppt, as shown in Figure 2 (upper bound c. 0.9ppt and lower bound 0.5ppt). The relationship between negotiated and actual wages and the gap between the series visible in Figure 3 can be explained mainly by two main factors, we think: 1) In the banking sector, more than in other sectors, employees benefit from “ad personam” wages, i.e. wages above the minimum level defined for each seniority category envisaged by the National Labour contract; this means that when there is a negotiated step-up in minimum level of wages, this is not reflected in a one-to-one increase in the actual wages (as they are already above). This factor probably applies more to investment banking, wealth
management, private banking, top management roles (i.e. for its business mix, MB would be particularly less sensitive to National Labour contract step-ups). 2) In the last decade, banks have been restructuring their networks, accelerating staff rotation via voluntary redundancy plans; this means that junior employees have replaced senior employees, changing also the seniority category mix within the workforce, and reducing the average wage of the sector. We expect this factor to still be visible going forward, given the already announced staff voluntary exit plans by the main Italian banks ISP, UCG, Banco BPM, BPER (and potentially MPS, as suggested by their business plan high level guidance) over the next three / four years.

Our forecasts suggest flat operating costs in 2022

In our models, we assume payroll and total costs flat in 2022, which is consistent with the above analysis, with the fact that less than 10% of the banks’ costs are linked to inflation in our calculation (Figure 4, where we take some of the administrative expenses, like utilities bills, transport, etc. – all administrative expenses are c.30% of the total cost base and this would represent the upper bound of inflation-linked cost bases over time, Figure 5), and with some other idiosyncratic considerations (banks’ cost-cutting efforts in term of staff lay-offs, which they have already announced and expensed in 2021). Figure 6 provides a bank-by-bank summary of this. We think ISP stands out because: 1) Already lower cost income level (53%, FY21), and better operating jaws (+2%) as summarized in Figure 7, Figure 8 and Figure 9; 2) Staff lay-off plans equal to c.9% of the Italian workforce (with all the one-off charges for these initiatives already paid for in the previous years); 3) Plan to also cut more than a third of the branches in the next four years .

What does inflation do to labour costs?