Germany’s wage deal is good for Europe too

Rarely has a round of wage negotiations been watched so closely as the recent dispute involving Germany’s IG Metall labor union. The agreement reached in Baden-Wuerttemberg with the Suedwestmetall employer’s federation, including a 4.3 percent raise from April and the right to a 28-hour working week, is a further sign that wage pressures are finally returning to the euro zone. This is
essential if the European Central Bank is to hit its inflation target of just below
2 percent.
The deal marks a shift from Germany’s recent wage-setting patterns. Unemployment has fallen sharply, giving trades unions greater bargaining power over employers. Worker representatives have exploited this position to push for higher wages as well better working conditions. The time for wage moderation — which characterized the decade since the 2002 labor market reforms — seems over.
The case for higher salaries in Germany remains strong but has evolved somewhat since the start of this decade. Throughout the 2000s, unit labor costs in Germany grew more slowly than the ECB inflation target. Along with the euro, this allowed Germany to become much more competitive than its partners, even though productivity only rose modestly. Since 2011, unit labor costs in Germany have begun to rise in line with the objectives of the central bank. However, even these increases have been insufficient to fill in the competitiveness gap which has opened up with other member states. It would be much easier still for the ECB to meet its target if unit labor costs in Germany rose faster than 2 percent per year. This would also help to reduce Germany’s current account surplus — which measures the flow of goods, services and investment. While this has begun to shrink, it still stands nearly at 8 percent of gross domestic product.
The IG Metall deal is complex, since it involves a mixture of one-off payments and outright wage increases. However, most economists believe it will raise annual pay in the industrial sector by more than 3.5 percent per year this year and the next. And since this agreement acts as a benchmark for other negotiations, overall wage growth in Germany is now expected to accelerate further. The Bundesbank had forecast wages to go up by 2.7 percent in 2018 and 3.1 percent in 2019, but Frederik Ducrozet, an economist at Pictet Wealth Management, think these figures could be revised up by up to half a percentage point following the IG Metall deal.
Of course, wage increases might have been even higher had union leaders stuck to their earlier demands for a rise of 6 percent. However, they preferred to settle for a deal that also gives workers the right to work just 28 hours a week for up to two years. Since workers will not be compensated for the hours they take off, this is akin to a flexible working time system rather than an additional pay rise. Companies will face some productivity losses — linked to the need to employ and train more staff — but they appear manageable overall.
A bigger problem is the impact that these wage increases will have on the competitiveness of the German economy if they are sustained. The issue arises only if German productivity growth remains sluggish. Here the newly formed grand coalition government has a role to play, for example boosting infrastructure spending — as it intends to do — to foster the efficiency of the economy. Germany can
afford to pay its workers more, but it can’t afford to do so indefinitely without also investing in future growth.
—Bloomberg