That German wages have grown very slowly given the country’s economic buoyancy is well known. The news, according to Oxford Economics economist Ben May, is that the long-awaited pick-up may be finally on the horizon.
May has looked at what economists call NAIRU, or Non-Accelerating-Inflation Rate of Unemployment. In other words, this is the level of joblessness that neither pushes prices up because the economy is running too fast, nor drags on them.
As the chart above shows, Germany’s labor market has been increasingly on the tight side since 2011. The number of people out of work has risen in only one of the past 28 months and joblessness in Europe’s largest economy is set to remain at a record-low 6 percent in November, according to economists polled by Bloomberg.
So why have wages failed to respond? The answer, for May, is the extremely low inflation in Germany and the euro area at large. In fact, even if nominal wages have been muted, real wages – taking price increases into account – have been growing at a faster pace than before the global financial crisis.
Down the road, wages will need to continue growing faster than inflation if workers are to reap the benefits of low unemployment.
“German nominal negotiated wage growth has been puzzlingly weak given the underlying tightness of the labor market,” said May. “With inflation set to rise sharply next year – we expect inflation to rise from an average of 0.5 percent this year to 1.8 percent in 2017 – and labor market conditions set to remain tight, workers and unions are likely to demand compensation for the rise in inflation. Accordingly, expect nominal wage pressures to build next year.”