This is not what a strong labor market looks like

The August labor market data came as a negative surprise. Although wages continued to grow rapidly (+11.1% yoy), employment in the corporate sector fell by 26,000 jobs compared to July.

This is not what a strong labor market looks like. If the wage growth we are seeing had solid foundations (read: productivity growth), companies wouldn't have to lay off workers. Meanwhile, since the beginning of the year, the number of employees in the corporate sector has decreased by a total of 46,000, with most of the losses (26,000) occurring in the industrial sector. This is a consequence of a weak performance of export-oriented industries, driven by low demand from the Eurozone, a strong Polish zloty, and wage pressure.

The data also seem to suggest that the minimum wage in Poland has risen too quickly. As a result, a new equilibrium in the labor market is being established at higher wage levels and lower employment. Confirming this hypothesis would require more in-depth research, but it is also a fact that the minimum wage as a percentage of the average wage has risen above 50%, which is very high compared to OECD countries.

Minimum wage as a % of the average wage in the enterprise sector
 
Source: Pekao Research based on StatOffice data

This complicates the situation for the Monetary Policy Council, which has recently taken a dovish turn in its rhetoric and would like to begin discussing rate cuts. However, the double-digit wage growth rate makes such a discussion difficult. If at least the momentum of this wage growth was slowing, one could speculate about when inflation might return to target. But that is not happening.

Annualized momentum of wage growth, % yoy*
 
*This indicator shows what the annual wage growth rate would be if the current seasonally adjusted monthly wage growth continued for a full year.
Source: Pekao Research based on StatOffice data

In the longer term, core inflation and the pace of wage growth must converge. It would be better for the economy and the MPC if wages did most of the adjustment and slowed down to, say, 6-7% yoy. However, after today's data release, the scenario in which core inflation starts converging toward wages, rather than the other way around, has become more likely. This presents risks to the MPC’s dovish shift, and there will be no breakthrough by the end of the year. Wage growth will remain in the double digits, and a slowdown will not begin until 2025. The key question now is whether the slowdown will be fast enough for inflation to reverse. For now, we remain skeptical about this.