March 31 (Bloomberg) -- German labor unions and government employers reached a last-minute agreement that settles a dispute over pay, removing the threat of all-out strikes in public services from hospitals to transport.

Interior Minister Wolfgang Schaeuble, chief negotiator for federal and municipal employers, and Ver.di labor union chief Frank Bsirske today backed a proposal on wage increases in return for longer working hours after a third consecutive day of talks in Potsdam, near Berlin. Unions representing police, teachers and other civil servants also supported the deal.

The agreement includes a retroactive 50-euro ($79) across- the-board monthly pay raise, topped up by a 3.1 percent increase for this year, backdated to Jan. 1, Schaeuble said. In eastern Germany, the raise will go into effect from April 1. Workers such as bus drivers, garbage collectors and kindergarten staff will then get a 2.8 percent raise in 2009, along with a one-time payment of 225 euros. Bsirske said the accord is worth 8.9 percent over two years.

``Both sides were convinced that workers should have a fair share of the overall economic development,'' Schaeuble told reporters in Potsdam. The federal government ``has gone to the very limit of what we can justify'' from a budgetary viewpoint.

Ver.di and the DBB civil servants' union had been seeking an 8 percent raise, the most since 1992, adding to European Central Bank concerns that companies may spur inflation by raising wages and prices to counter increasing costs. Unions across Germany are pressing for above-inflation pay raises after years of belt tightening, their demands emboldened by soaring consumer prices.

ECB Cut `Very Unlikely'

``Such an increase in pay further complicates the ECB's task of conducting its monetary policy amid concerns about the economy and inflation,'' Eckart Tuchtfeld, an analyst at Commerzbank AG in Frankfurt, wrote in a note to clients. ``With this'' pay accord ``a cut in interest rates in the second quarter has become very unlikely.''

Germany's inflation rate, based on a harmonized European Union method, rose to 3.2 percent in March from 2.9 percent in February, the government said March 28. Inflation in the euro region, which the ECB seeks to keep just below 2 percent, may accelerate to 3.5 percent this month, according to economists' estimates.

Cost to Employers

The pay accord will cost local governments 9.5 billion euros, said Thomas Boehle, head of the VKA local employers' lobby. The federal government will shoulder a combined burden of 1.2 billion euros this year and next, and 1.9 billion euros per year from 2010, Deputy Finance Minister Werner Gatzer told reporters. The deal affects as many as 2.1 million workers on federal and local government payrolls.

The agreement gives a ``clear increase in pay to municipal workers'' of as much as 7 percent for low income-earners in both parts of Germany, Bsirske said at the press briefing. In return, unions agreed to a ``moderate'' increase in work time in some western states, he said.

The compromise envisages most public-sector staff in western Germany working 39 hours per week, up from about 38.5 hours at present. Exceptions will be made for some professions such as nursing. In eastern Germany, staff already work 40 hours.

``Overall, according to our calculations, excluding one-off payments the deal seems equivalent to a 3.7 percent annualized increase per year over the next two years,'' Gareth Claase, an economist at Royal Bank of Scotland Plc in London, wrote in a note. That's ``about half the union's initial demand of 8 percent, but significantly higher than the employers' initial 2.5 percent offer.''

Token Strikes

Ver.di, Germany's second-biggest union after IG Metall, rejected a mediated proposal last week and had said it planned to hold a nationwide ballot on unlimited strikes as early as tomorrow. Ver.di called 230,000 members out on token strikes in the first week of March, disrupting buses, flights, garbage collection and other services to underline its resolve.

Public transport workers in Berlin are meanwhile threatening unlimited strikes on bus, tram and subway services from early tomorrow to press their demand for a pay raise of as much as 9 percent. Ver.di is in talks with city employers today to try and broker an accord.

Postal workers are also preparing for short ``warning'' strikes at Deutsche Post AG tomorrow to press their pay demands. A first round of talks with employers broke up without result March 28 and a second round is planned for April 9 in Cologne.

Chemical employers and the IG BCE labor union meet in Hanover tomorrow to try to broker a wage accord for more than 500,000 workers at companies such as BASF SE and Bayer AG. The union is pressing for as much as 7 percent more pay.

On Feb. 20, IG Metall won a 5.2 percent raise for about 85,000 steelworkers after asking for 8 percent.

ECB President Jean-Claude Trichet said March 26 it's ``imperative'' to avoid ``second-round effects,'' a term that describes attempts to offset higher costs for items such as food and energy through bigger pay or price increases.

To contact the reporters on this story: Rainer Buergin in Potsdam at rbuergin1@bloomberg.net.

Last Updated: March 31, 2008 12:01 EDT