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

The prospect that Europe’s surging inflation could stoke pay is being put to the test in the region’s largest economy as 3.5 million Germans in the public sector struggle to secure significant raises in wage talks.

With annual consumer prices rising there by 4pc and heading even higher, a new round of negotiations on November 1 will help show if the post-crisis landscape has bolstered bargaining power at the heart of the eurozone. The evidence so far doesn’t favour the workers.

While a hard pushback from employers set the scene for a round of strikes, it also provided a clue to European Central Bank policymakers wondering if the pandemic has fostered a sea change in inflation after years of lacklustre price increases. That judgment is crucial as officials prepare to reinvent stimulus for after the crisis.

Leading the talks is Ver.di, the second-largest union in Germany, which is seeking a 5pc raise for employees of federal states in a deal likely to be replicated across the public sector.

Other agreements – including one for public-sector workers in the state of Hesse negotiated separately – point to final increases likely to be less than half of that, reflective of an economy still nursing crisis wounds.

“It would be quite unusual to get a wage agreement of 5pc in an environment where the labour market still has spare capacity,” said Jari Stehn, chief European economist at Goldman Sachs Group, in London.

“That usually only happens when you have a tight labour market, which is not really the case at the moment.”

As a backdrop to the negotiations, higher energy costs and global trade bottlenecks have caused a price spike in eurozone inflation, which is likely to hit 3.7pc in October.

The Bundesbank predicts the rate will approach 5pc at the end of the year.

The question of whether such inflation will feed into wages is key for the ECB.

Officials reckon current price increases will prove transitory, but hawkish policymakers cite pay pressures as a reason to consider winding down stimulus.

That risk has yet to materialise in Germany. Employers have rejected Ver.di demands including at least €150 more a month – double the amount for the health sector.

Chairman Frank Werneke is committed to a hard fight.

“Public sector colleagues have kept this country going,” he said.

“We’ve received applause and encouragement, but we’re saying applause alone doesn’t cut it, and now prices are rising too.”

Despite such tough talk, recent deals show unions settled for average increases of just over 2pc.

That’s below a formula saying raises aren’t inflationary until they exceed productivity growth plus expected price gains, which would be 3pc.

Jobs-market slack might partly account for such outcomes, as Mr Stehn suggests – unemployment is higher than before, and supply shortages have sent more factory workers into furlough – but the results also reflect the subtle nature of bargaining in Germany.

“Labour unions may bring up high inflation rates during the negotiations, but normally they have their eyes on the medium to long term,” said Sebastian Dullien, research director at the Macroeconomic Policy Institute in Dusseldorf, a think-tank close to the unions. “They understand agreements that would lead to faster inflation are of no use.”

Informing that view is a 1970’s episode where a wage spiral sent the economy into a recession and ended full employment in Germany.

Many companies are also still struggling with aftershocks of the pandemic, rebuilding capital buffers or repaying loans.

Still, there’s a chance pay pressures could build further. Personnel and management consultancy Kienbaum expects wages to rise an average of 3pc next year. Some sectors facing labour shortages may see bigger gains.

Germany’s minimum wage is set to be boosted by 25pc, a win for Finance Minister Olaf Scholz in negotiations to form a government under his leadership after he led his Social Democrats to victory in September elections.

Whatever public sector workers accept may influence other negotiations.

IG BCE, which represents 600,000 mining, chemical and energy workers, will present wage demands next month before bargaining starts in March.

Companies in those industries harbour even more job-preservation worries at a time when the economy is being transitioned toward a climate-friendly, digital future that might threaten traditional manufacturing.

And associated investment costs will also limit room to grant higher pay, according to Hubertus Bardt, head of research at the German Economic Institute in Cologne, a think-tank aligned with employers’ groups.

“Switching a steel plant to green production costs billions without increasing capacity,” he said. “We mustn’t force firms into wondering if they should invest here or elsewhere.”

 

Bloomberg