German Civil Servants Get Pay Increase in Excess of Inflation

It is not being widely discussed, but we suspect the wage settlement in Germany over the weekend is an important development. The agreement that covers 765k state government workers in Germany, represented by Verdi, reached a two-year deal for a 5.6% wage increase. It includes a retroactive 2.65% from the start of this year, and a 2.95% wage increase next year. 

The agreement effects 15 German states. Only Hesse, which is not part of the collective agreement, is not formally taking part. A year ago, German municipal workers won a 6.3% wage increase over two years.

German inflation stood at 1.5% in February, the lowest since December 2010. The wage agreement amounts to a real wage increase. There are both domestic and broader implications. Domestically, it may help lift wages more generally and support domestic demand. Retail sales were considerably stronger than expected in January rising 3.1% on the month (consensus was for a 0.9% increase). It was the strongest monthly rise in nearly 5 years.

In addition, the stronger domestic demand may help lift imports, which is the output of other countries. Data released earlier today showed a 3.3% rise in Jan imports, the strongest in eight months. The consensus forecast was for a 0.7% increase. 

A general increase in German wages may help also weaker economies in the euro area in another way. In the years leading up to the financial crisis, unit labor costs in the periphery (and France) rose markedly compared with Germany. This illustrated diminished competitiveness that was masked by the continued borrowing and the recycling of the North's surplus. The crisis changed this, of course, and most of the periphery, except Italy (and France) have taken measures, especially in the public sector, that has resulted in downward pressure on unit labor costs.

However, there is a political and social limit (even if not known ex ante) on the ability to accept higher unemployment and reduction in wages. Structural reforms to boost productivity have not received the attention that has been given to the reduction of the civil servant work force and the reduction in their wages and benefits. Some effort to raise what some economists have called the "hyper-competitive" German unit labor costs, can help reduce the pressure on the debtor countries to bear the sole burden of the adjustment.

The ever astute German Chancellor Merkel had tacked more than a year ago in this direction. Her CDU now advocates a "wage floor" (distinguished from a "minimum wage") for those sectors in Germany that are not covered by a private sector agreement between employers and employees. 

Germany does not have a legal minimum wage and the CDU has been opposed to one for years. Specific industrial sectors have their own. The SPD-controlled Bundesrat has proposed an 8.5 euro and hour minimum wage.

The CDU/CSU position may cynically be seen as an attempt to co-opt and assimilate some of the opposition thunder and issues. However, the cost is to squeeze the beleaguered junior coalition partner, the Free Democrats. The FDP is opposed to a statutory nationwide minimum wage, and even signing up to a "wage floor", would be seen as a capitulation. Polls suggest that without greater public support, the FDP may not have sufficient votes to give the CDU/CSU a majority, forcing Merkel to form an awkward coalition with possibly the Greens, or accept another Grand Coalition with the SPD.