Under-Appreciated German and Japanese Wage Developments

Last week more than 3/4 a million state workers in Germany won a 5.6% wage increase over a 2-year contract. Today I.G. Metall, the largest and most important private sector union, confirmed that at negotiations the begin on March 19, it will seek a 5.5% wage increase over the next year. Separately, large Japanese companies have indicated willingness to grant higher wages and/or bonuses as the spring labor negotiations get under way.

It is, of course, easy to succumb to the cynical view that the civil servant wage increase in Germany is an election year ploy. Last year's pay hike for municipal workers did not in fact carry over and boost Merkel's CDU in the numerous state elections last year. Simply put, the situation is much more complicated.

Real wages rose in Germany rose for the third consecutive 2012 and appear set to do so again here in 2013. Look at the quarterly pattern of nominal wage increases in Germany last year: 2.1% in Q1, 2.5% in Q2, 3.0% in Q3 and 3.2% in Q4. 

Private sector wages increases have little to do with any purported government electioneering. Last year, I.G. Metall sought a 6.5% increase, but in the end accepted a 4.3% increase covering 13 months--which at some 7 bln euros, was the biggest award in two decades. 

Yes, the employers association (Gesamtmetall) will push back against the 5.5% demand. It argues that output fell last year and only a small increase is likely this year. The employees are seeking to recoup some of the ground lost to inflation and productivity growth after years of wage restraint. Warning strikes--limited industrial action-- is possible in the coming weeks. 

The significance of higher German wages is difficult to exaggerate. An increase in disposable income may help fuel domestic demand. Recall Germany, like China, exports around 40% of GDP. China is under pressure to rebalance its economy toward domestic consumption. Some argue this is a natural development. Yet Germany, a mature high income country, has yet to make that transition. Weaker growth in the European periphery and many emerging markets may force Germany to rely more on the demand it can create domestically.

Separately, but just as importantly, higher German wages can be an important part of the adjustment process in Europe. The pressure has been on peripheral countries (and France) to boost competitiveness by reducing unit labor costs. Where this has been done (not in Italy or France) it has been concentrated in the public sector with job, wage and benefit cuts. However, the increase in German unit labor costs, all told quite modest, does take some pressures off the peripheral countries have to bear the sole burden of the adjust process.

These wage developments, coupled with the OMT and EU efforts that encourage less draconian austerity (by giving at least some countries extra time to reduce the deficit and allow productive public sector investment), reinforce the idea that European officials--not just the ECB--are continued to reduce the risk disintegration of EMU.

Over in Japan, auto makers and other large companies are raising wages and/or bonuses in the spring round of labor negotiations. Toyota, for example, recently agreed to the largest pay increase in five years. It granted a bonus equivalent to 5-months average salary and an extra JPY300k payment. The average pay out is JPY2.05 mln (~$21.4k). Bonuses at Nissan were equivalent to 5.5 months of salary with an average payout of JPY2.04 mln.

It is hoped that such wage developments in Japan can help accomplish two things. First, it is thought that higher wages can help boost domestic consumption. It would seem to make sense. However, it remains to be proven as the small living spaces and culture suggests that the Japanese household is not about to "shop until they drop" as Americans are thought to do. In addition, the propensity to consume in Japan is extremely stable. It is possibly that under the watchful eye of the archetype Mrs Watanabe, who manages household finances, may look to boost financial assets rather than consumption.

Second, to the extent that businesses seek to pass on the higher wage will to customers it may help the new BOJ arrest deflation. This too has to be seen as Japanese business traditionally compete by retaining market share when faced with an price shock. 

We have argued that the real challenge post-crisis is to generate aggregate demand. Export oriented strategies borrow from other countries' aggregate demand. We see real wage growth helping, even if on the margins, to boost demand. At the same time, real wage growth also is an important way to redress the growing inequality that has reached unprecedented proportions and undermines not just the broader economy, but the political center as well.