German Metal Workers’ 4.3% Pay Settlement Seen Setting Benchmark

A 4.3 percent pay increase for German metal workers doesn’t pose an inflation threat even as it sets a precedent for other industries, economists said.

The IG Metall union said the 13-month deal for 800,000 workers in the state of Baden-Wuerttemberg will serve as a benchmark for the 3.6 million metal workers across Germany. Economists including Holger Schmieding at Berenberg Bank said the settlement, which equates to a 4 percent gain in annual terms, will also provide a model for other industries in Europe’s largest economy.

It “surpasses the 3 percent pace which we consider compatible with both full employment and inflation below 2 percent in the long run,” said Schmieding, chief economist at Berenberg in London. “There is, however, no need to be concerned about a price-wage spiral. The service sector should get lower wage hikes, and higher wages in the metal industry are not going to be passed on to prices.”

German workers are seeking pay increases that exceed inflation as unemployment at a two-decade low bolsters their bargaining power. Wage restraint over the past decade has increased companies’ competitiveness and helped the economy to weather Europe’s sovereign debt crisis, widening the divergences between Germany and some of its euro-area partners.

“The wage increases were deserved and will help to support private consumption and thereby economic growth,” said Jens Kramer, an economist at NordLB in Hanover, Germany. Still, “there is no need to worry about inflation getting out of hand in Germany,” he said.

Inflation Limit

The IG Metall wage increase was twice the European Central Bank’s 2 percent inflation limit and well above Germany’s 2.2 percent inflation rate. The union had asked for 6.5 percent.

Ver.di, the country’s main labor union for non-manufacturing workers, won agreements in late March for a pay increase of as much as 6.3 percent over two years for state and municipal employees. Negotiations are also taking place in other industries.

Germany’s chemical-sector union, IG BCE, is demanding a 6 percent industry-wide pay raise over 12 months for 550,000 employees. Ver.di is also seeking a 6 percent increase for 220,000 workers in the banking industry.

Germany recorded growth of 0.5 percent in the first quarter even as eight euro-area countries were in recession.

German inflation will probably exceed the euro-area average this year, Schmieding said. “But we maintain our view that this change in relative positions will occur by inflation falling elsewhere in Europe due to labor-market slack and weak demand, and not by German inflation rising above its current level.”

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