Bumper German Pay Deals and an Unrubbed Nose in Audi Town

On a sunny afternoon in the hometown of German carmaker Audi AG, a sculpture that allegedly protects against the perils of unemployment isn’t getting much attention.

Instead of lining up to rub the nose of Carl Wilhelm von Heideck, a 19th century military officer and painter, most residents of Ingolstadt are too busy working. The Bavarian city in an area with a jobless rate of 2.3 percent, the lowest in the country, is a symbol of a labor market so tight that wages are headed for the biggest gain in more than two decades.

What’s more, the Bundesbank, long-time guardian of price stability, says that’s fine.

“I’ve already received three unsolicited job offers but I wasn’t interested,” said Julia Eikermann, 23, who studies computer science at the Technische Hochschule Ingolstadt next to the labor agency where the 2.4-meter-high Heideck bust stands. “If you want a job here, you find one. Even if you don’t work in the car industry.”

Bundesbank President Jens Weidmann estimates that wage increases negotiated by German unions are averaging about 3 percent this year. With the central bank forecasting inflation of 1.1 percent in 2014, that’s equivalent to a real rise in pay of 1.9 percent. Data compiled by the Federal Statistics Office shows that would be the highest since 1992.

It is “to be welcomed that wages and salaries are rising more strongly than in the days when the German economy was in much poorer shape,” Weidmann said in comments published on the Bundesbank website last week. “We have close to full employment in a number of sectors and regions, and we are seeing more and more reports of labor shortages.”

ECB Meeting

Germany’s challenge contrasts with that of the 18-nation euro area as a whole, which is struggling with near-record unemployment more than a year after emerging from its longest-ever recession. That’s depressing wages, which in turn curbs demand and slows the recovery.

The European Central Bank, which meets in Frankfurt this week to set monetary policy, has cut interest rates to record lows and announced unprecedented liquidity measures to steer the region away from deflation. Inflation was 0.4 percent in July, the weakest since 2009.

Better-paid workers in the region’s biggest economy could be part of the solution if they use their extra income to buy goods from other euro-area countries. German wages last year were lower on an inflation-adjusted basis than in 2003, when the first of the so-called Hartz labor reforms were implemented, according to the statistics office.

Hartz Reforms

Those reforms are credited with helping keep labor costs in check and creating jobs. Former Volkswagen AG Human Resources Director Peter Hartz headed a commission that recommended added employment incentives while cutting jobless benefits and making it easier for some companies to fire workers.

In 2005, when the fourth and final round of measures started, German unemployment rose as high as 12.1 percent. This year it fell to 6.7 percent, the lowest in at least two decades. Using a standardized European Union measure, it was 5.1 percent in June, compared with 11.5 percent in the euro area and 24.5 percent in Spain.

That’s handed more negotiating power to employees in a country already preparing for the introduction of a national minimum wage of 8.50 euros ($11.61) an hour.

German chemical companies agreed early this year to a 3.7 percent pay rise over 14 months, after a union demand for 5.5 percent. The IG Metall labor union reached an agreement for an increase of 2.3 percent effective last month and 1.7 percent in May 2015 for about 75,000 steel workers in northwestern Germany.

Pay Disputes

Business leaders are showing signs of pushing back against the trend. Of 502 executives interviewed in a Forsa survey published by Handelsblatt today, 62 percent said higher pay agreements aren’t currently appropriate and more than 83 percent said the Bundesbank shouldn’t comment on wage increases.

Some demands are creating disputes. The Verdi union has called for strikes at all nine of Amazon.com Inc.’s German plants in coming weeks in a disagreement over wages, and said 500 bank employees in northern Germany walked out in June. Airline Deutsche Lufthansa AG cut its full-year earnings forecast in part because of a pilots’ strike.

Volkswagen, the parent company of Audi, has a collective bargaining agreement with unions through 2015, and calls for higher wages are “not an issue for us,” Christian Klingler, head of sales and marketing, said on a telephone conference last week.

Skills Shortage

Employers that don’t step up may struggle to find staff. Municipal authorities agreed in April on a 5.4 percent wage increase over two years and can’t afford anything extra, according to Gerd Landberg, head of the Association of German Cities and Municipalities, which represents 11,000 communities in the country.

“We don’t have any wiggle room,” he said in an interview last week. “In certain segments, for example in information technology, it’s incredibly difficult for us because industry can pay more.”

The government says it has identified labor shortages in 20 industries as diverse as nursing and machine fitting, and plans to start an initiative for skilled workers this year.

“In the southwest of the country, in various sectors, problems are especially bad,” German Labor Minister Andrea Nahles told reporters in Berlin last week. “We have every reason to make the securing of skilled labor a priority over the coming years and we intend to do just that.”

Few Applicants

If that requires even higher pay, there is room, according to Enzo Weber, head of research at the Institute for Employment Research in Nuremberg, who sees a “wage gap” of 6 percent to 8 percent. Government data shows labor productivity rose from 1991 until the eve of the global financial crisis in 2007, while real wages remained little changed until 2004 and then declined until 2011, he said.

“If you have a longer-term perspective, there is room for wages to catch up,” said Marcel Fratzscher, president of the DIW Institute for Economic Research in Berlin. “It would be possible, for one or two years, for wages to grow beyond what the economic situation would allow.”

In the meantime, employers in Ingolstadt are feeling the pinch. The labor agency says companies that sponsor vocational training courses have trouble finding applicants. Of 3,548 positions offered since October, almost a third haven’t found takers.

In a clothing shop on Ludwigstrasse, the city’s central pedestrian street, behind a large red-and-white sign that reads “Careers. Enter here,” the manager says two positions have been advertised for more than a month and there is little chance of them being filled anytime soon.

Outside, the attitude among citizens is relaxed.

“The statue is just a bit of fun,” said Robert Alonso, a 45-year-old freelance musician. “But what’s wrong with believing it works?”

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