There can be no optimal results from wage negotiations. The introductory economics textbook already knows that. Employee wages are always a profit-reducing cost for employers. In and of itself, each wage round is a zero-sum game for the economy as a whole, with income being redistributed.
Irrespective of this, the employer side appeals to the public’s fear of inflation, which has been anchored in the collective memory since the hyperinflation of the 1920s, before each wage round, and paints the specter of a self-fueling wage-price spiral on the wall. The argument goes that this spiral will force the central bank to raise interest rates, which in turn will slow down overall economic development. Potential income gains would then be destroyed again.
The union side, on the other hand, uses the argument that wage increases increase purchasing power, thereby boosting demand and promoting an upswing.
Viewed in isolation, both arguments are understandable and not wrong a priori. Ultimately, however, collective bargaining is about distributing the scope for distribution opened up by productivity gains fairly fairly between employers and employees.
Employers and the large German industrial unions – often in contrast to the sectoral unions – have consistently demonstrated a high degree of responsibility over the past few decades. In addition to the interests of the employees, these unions always kept an eye on job retention and the competitiveness of export-dependent German industry.
Social peace is a German location advantage
And quite a few employers, for example in the automotive industry, often paid their employees a four-digit bonus so that the employees could share in the company’s success. In the national accounts, this “fair” distribution of income growth is reflected in a wage share, i.e. the share of wages and salaries in national income, which has been hovering around the 70 percent mark for decades.
The associated high degree of social peace became an important locational advantage for Germany. While in France, between 2011 and 2020, a total of 91 working days per thousand employees lost an annual average due to strikes, in Germany it was only 18 days.
A major reason for the consistently moderate wage development in Germany over the past three decades was that when the Iron Curtain came down on June 27, 1989, a huge low-wage area arose right on our doorstep.
Many companies took advantage of the opportunity and relocated labour-intensive production to the Eastern European countries that were now integrated into the international division of labor – or at least could credibly threaten to do so. Thanks to the consistently clever wage policy of the industrial unions, the export-dependent industry not only managed to maintain well-paid jobs in Germany through rationalization and internationalization of the supply chains, but also to create new jobs.
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The pandemic, the war in Ukraine and the energy crisis have undoubtedly led to an unusual situation. Overall economic output has not actually grown for twelve quarters now – and there is no sign of an end to this weak phase anytime soon. After many years without relevant inflation, the price level is now likely to rise by more than 20 percent within three years and put real wages under massive pressure.
The most recent data from the Federal Statistical Office for February confirm that there are no signs of a rapid decline in inflation so far. According to preliminary data, inflation in February was 8.7 percent and thus hardly less than in the record month of October 2022, when 8.8 percent was measured.
The demands of the unions are understandable
At the same time, reports by many listed companies of record profits in the past year give the impression that the most recent crises left this part of the German economy untouched. The high expectations of the union members after a “proper sip of the wage bottle” are therefore understandable. Collective bargaining for around eleven million employees this year is therefore likely to be significantly tougher than in the past, not least because there is an urgent need for workers in many sectors.
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For the employee side, it is a happy coincidence in the collective bargaining calendar that those unions whose counterparts are not in international competition negotiate first: the public service, the railways and the post office. No employee there needs to worry that their job will be relocated abroad – and so the unions there can come up with demands for double-digit wage increases with a clear conscience.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. More about his work and his team at research.handelsblatt.com.
Even in the unlikely event that these demands would be enforced, given the state-regulated prices in these areas, there could hardly be any talk of the start of a wage-price spiral.
Experience has shown that these demands are flanked by high-profile warning strikes, and then in the course of the negotiations – well disguised by high one-off payments that do not affect the spreadsheet – melt down to a good half. Deals close to the average inflation rate of the past year of just under seven percent should then become the guideline for other sectors that are more internationally competitive.
Wages will rise, but will not compensate for the real wage losses
Of course, wages will rise, especially in those sectors where there is a shortage of labour. However, this has nothing to do with a wage-price spiral, but is a sign of scarcity, which, as is well known, leads to rising prices in market economies. It is therefore to be expected that the economy as a whole will see moderate real wage growth at the end of this year.
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However, the three previous years with sometimes significant losses in real wages will certainly not be made up for. By the end of 2023, too, workers will consistently be noticeably poorer than they were at the end of 2019.
It is unlikely that these real income losses will be made up for in the near future. Because the multi-crisis has made Germany poorer in the long term. Society as a whole will have to shoulder the associated loss of real income. Who has to bear what share of this is the responsibility of the collective bargaining partners and those responsible for tax policy. The same applies here: There is no such thing as an optimal result.
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