German public sector wage demands put ECB inflation policy to the test

The prospect that soaring inflation in Europe could fuel wages is put to the test in the region’s largest economy as 3.5 million Germans in the public sector struggle for significant increases in negotiations salaries.

With annual consumer prices increasing by 4% and going even higher, a new round of negotiations on November 1 will show whether the post-crisis landscape has strengthened bargaining power in the heart of the eurozone. So far, the evidence does not favor workers.

While strong reluctance from employers set the stage for a series of strikes, it also provided a clue to policymakers at the European Central Bank wondering whether the pandemic has fostered a drastic shift in inflation after years of small price increase. This judgment is crucial as officials prepare to reinvent post-crisis stimulus.

Ver.di, Germany’s second-largest union, is seeking a 5% raise for federal state employees in a deal that can be replicated across the public sector.

Other agreements – including one for public sector workers in the state of Hesse negotiated separately – indicate final increases likely to be less than half of these, reflecting an economy still hurt by the crisis.

“It would be quite unusual to get a 5% wage deal in an environment where the labor market still has slack,” said Jari Stehn, chief European economist at Goldman Sachs Group in London.

“This usually only happens when you have a tight job market, which is not really the case right now.”

As a backdrop to the negotiations, rising energy costs and bottlenecks in global trade have caused inflation prices to spike in the eurozone, which is expected to reach 3.7% in October.

The Bundesbank expects the rate to approach 5pc by the end of the year.

Whether such inflation will spill over into wages is critical for the ECB.

Officials believe the current price increases will prove to be transitory, but hawkish policymakers cite wage pressures as a reason to consider cutting stimulus measures.

This risk has not yet materialized in Germany. Employers have rejected Ver.di’s claims to include at least € 150 more per month – double the amount for the healthcare industry.

President Frank Werneke has engaged in a bitter fight.

“Colleagues in the public sector have brought this country to life,” he said.

“We got applause and encouragement, but we say applause alone is not enough, and now the prices are going up too.”

Despite such tough discussions, recent agreements show that the unions have been content with average increases of just over 2pc.

This is below a formula that says increases are not inflationary until they exceed productivity growth plus expected price gains, which would be 3pc.

The slowdown in the job market may partly explain these results, as Mr Stehn suggests – unemployment is higher than before and supply shortages have put more workers on leave – but the results also reflect the subtle nature of negotiations in Germany.

“Unions can talk about high inflation rates during negotiations, but normally they have their eyes on the medium to long term,” said Sebastian Dullien, research director at the Macroeconomic Policy Institute in Düsseldorf, a think tank close to the unions. “They understand that deals that would lead to faster inflation are of no use.”

Informing this view is an episode in the 1970s when a wage spiral plunged the economy into a recession and ended full employment in Germany.

Many companies are also still grappling with aftershocks of the pandemic, replenishing capital reserves or repaying loans.

Still, there is a chance that wage pressures will escalate. The personnel and management consultancy Kienbaum expects wages to increase by an average of 3% next year. Some sectors facing labor shortages could register larger gains.

Germany’s minimum wage is set to be raised by 25%, a victory for Finance Minister Olaf Scholz in negotiations to form a government under his leadership after leading his Social Democrats to victory in the September elections.

Anything that public sector workers agree to can influence other negotiations.

IG BCE, which represents 600,000 workers in mining, chemicals and energy, will present wage demands next month before negotiations begin in March.

Companies in these sectors have even greater concerns about preserving jobs as the economy transitions to a climate-friendly digital future that could threaten traditional manufacturing.

And the associated investment costs will also limit the possibility of awarding higher wages, according to Hubertus Bardt, head of research at the German Economic Institute in Cologne, a think tank aligned with employer groups.

“Switching from a steel plant to green production costs billions without increasing capacity,” he said. “We should not force companies to wonder whether they should invest here or elsewhere.

Bloomberg

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