Payback Years Seen Rolling On in Germany as Wage Talks Gain Pace

  • Sizeable increase may help ECB as antidote to low inflation
  • Employers union warns of external factors shaping strategies

In most European countries, general pay increases of more than 3 percent would be unattainable. Not so in Germany, where unionized workers are expected to achieve just that in negotiations for new contracts getting under way.

Call these the payback years. In the early part of the century and in the aftermath of the financial crisis, unions showed restraint, bowing to government reforms and measures in return for job security. Of late, German organized labor has been reaping the benefits of low unemployment and sustained corporate profitability.

Negotiated wages have climbed an average 2.8 percent a year since 2012, data from the Hans-Boeckler-Stiftung research institute show. That’s increasingly out of step with inflation, which is just above zero. Last year, IG Metall, the country’s largest union, demanded a 5.5 percent increase before ultimately securing 3.4 percent.

The 2015 agreement expired last week, and negotiators are seeking an additional 5 percent for the next 12 months for 3.8 million workers. Verdi, a service-sector union, is campaigning for a 6 percent increase in public-sector wages. All told, contracts for almost 12 million employees are up for renewal this year, according to the German Trade Union Confederation.

“I think there is scope for another 3 percent,” said Carsten Brzeski, chief economist at ING-Diba AG in Frankfurt. As Germany’s population ages in the coming years, “we’re going to see wage increases, and the labor market is simply going to stomach them,” he said.

Unions may be emboldened to push even harder this year because Germany is at what economists including Brzeski view as full employment: unemployment claims are at a record low of 6.2 percent. With few people seeking jobs and a rapidly ageing population, companies also face increasing pressure to pay more to retain and attract staff.

“There will continue to be a strong feeling among workers that after the lean years in Germany, when they expected wage restraint, now it’s payback time,” said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute in Washington, D.C.

Continued gains “mean that the economic development that we’ve seen in the last couple of years in Germany -- where increasingly domestic demand, growth internally and consumption drives growth, not exports -- will continue,” he said.

Significant wage increases in Germany could provide an antidote to stubbornly low inflation that’s stymying the European Central Bank’s recovery plans for the euro area. Similar gains to last year would offer a powerful stimulant for consumer spending, which has become the cornerstone of growth in the region’s biggest economy as external demand wavers.

The ECB has missed its near-2 percent inflation goal for three years now.

“One of the greatest fears that the ECB has is that German wage increases do not materialize, because if that happens, it will be very difficult to get inflation back,” Peterson’s Kirkegaard said. “They really do need Germany to lead the way.”

The wage negotiations won’t be all plain-sailing. While unions may set the tone in the private sector, they only represent a slice of all employees. About 18 percent of wage and salary workers in Germany are unionized, based on OECD data.

Also, despite Germany’s strong economy, some arguments speak against overstepping on increases. Low inflation leaves companies with little pricing power, making it harder to pass on higher labor costs to their customers.

Productivity growth has also been benign across developed economies in recent years, raising concerns about whether wage increases may be underpinned by temporary factors that are boosting profitability.

German industry has shifted investments abroad over the last two decades to cut costs and boost market share. Substantial domestic pay increases could provide additional incentives to cut costs by moving to lower-wage markets, according to Gesamtmetall.

“Low interest rates, low oil prices and a weak euro are essential reasons for our competitiveness, but these don’t lie in our hands,” Rainer Dulger, Gesamtmetall’s president, said in an interview with German daily newspaper Suedwest Presse in March. “We can’t increase wages and salaries in the hope that it stays that way. If one factor changes, we’re in trouble.”

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