Real wages shrink across developed economies amid Iran war: report

Real wages are falling in a growing number of advanced economies, according to a recent report. 

This comes as the energy shock unleashed by the Iran war and the closure of the Strait of Hormuz pushes inflation ahead of pay growth in the United States, the United Kingdom, and across much of the Eurozone, reports the Financial Times.

The reversal ends a two-year period of gradual real-wage recovery and renews pressure on compensation budgets.

Inflation outpaces earnings

US inflation climbed to an annual 3.8% in April, while average hourly earnings rose 3.6% over the year — the first time in two years that prices outpaced pay, according to the Financial Times.

In the United Kingdom, average weekly earnings excluding bonuses grew just 0.1% in real terms in the three months to March, and are forecast to fall outright as inflation climbs.

Diane Swonk, chief economist at KPMG US, said "the war is roiling supply chains and will push prices higher [than] before, even if the strait were to open tomorrow."

Claus Vistesen of Pantheon Macroeconomics expects real wage growth to hover near zero across the Eurozone in 2026, and to turn "deeply negative" in countries such as France, according to the report.

Canada’s annual inflation rate accelerated in April as surging energy costs pushed the Consumer Price Index (CPI) up 2.8% year over year, Statistics Canada previously reported. 

Labour market risks mount

Economists cited by the Financial Times identified two risks for policymakers: that households cut spending and force employers to shed jobs, or that workers bid up wages and entrench inflation. 

Michael Feroli, chief US economist at JPMorgan, said the real wage shrinkage was "all about the Middle East conflict" and predicted that "I would expect real wages to start growing again" if the strait reopens.

Swonk warned that persistent inflation would "narrow profit margins and take a toll on hiring," adding: "It is in that way that persistent bouts of inflation become a labour market problem." In the UK, unemployment is rising and vacancies sit at a five-year low, weakening worker bargaining power as the squeeze deepens.

In the euro area, compensation per employee grew almost 2% in 2025, but the European Central Bank's measure of negotiated wages indicates unions are struggling to secure such terms in 2026 as job-security concerns rise. Vistesen said French consumers were "really taking it on the chin" because the government lacks fiscal room to cut taxes.

Andrew Kenningham of Capital Economics said the Eurozone now looked likely to enter a mild recession, warning: "The bigger the hit to the economy, the slower the recovery in real wages."

In Canada, the labour force participation rate stands at 64.9%, above the U.S. rate of 61.9%, with women’s participation in the 25‑to‑54 age group reaching 85% in 2025 — nearly seven percentage points higher than in the U.S., according to a previous report from Canadian federal government.

Here are the most current wage-growth projections for Canada covering the next roughly 12 months: