Short Insight – German 6% wage demand an isolated case

by: Aline Schuiling

  • Germany’s largest trade union IG Metall has demanded a 6% pay rise and the option to reduce the number of weekly working hours
  • This demand reflects that the German labour market is tightening,  although IG Metall’s demands were never met fully in the past
  • We do not think this aggressive wage demand is reflective of a broader trend within the eurozone
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IG Metall’s demands always well above the final settlement

The largest German trade union IG Metall (representing workers in the metal and electrical industries) has demanded a 6% pay rise for 2018. On top of that, it wants workers to get the individual right to cut their working week from 35 to 28 hours. The latter demand met strong resistance from employers, who claim that they already face a shortage of labour currently. Consequently, the trade union organised a number of strikes earlier this week. Although the outcome of the negotiations is highly uncertain, history has shown that IG Metall’s original wage demand tends to result in a pay rise equal to between 40% and 80% of the demand. That said, the link with changes in labour market conditions is not very strong.

 

 

 

 

 

 Germany’s labour market has tightened

The high wage demand by IG Metall reflects that Germany’s labour market has tightened. The unemployment rate (national definition) has declined to close to 5% which is the lowest level since the start of the series in 1991. The ratio between the number of job vacancies and employment has risen to record-high levels as well.

Because of the tightness of the labour market it seems likely that IG Metall could be able to get a pay rise that equals around 70-80% of its demand this time, although the possible reduction in working hours might be more difficult and there might be some trade-off between a pay rise and a reduction in working hours.

 

 

 

 

 

Germany’s labour market not representative for the eurozone

The current tightness in Germany’s labour market is not representative for the eurozone as a whole. The majority of the other big eurozone countries still face significant slack in their markets, according to broader U6-definition (including unemployment and also people that are working part-time, but would like to work more hours and people that are not working, but do not meet the strict criteria of the unemployment statistics). Indeed, Germany is the only of the big countries where total slack in the labour market has fallen well below the pre-crisis levels of 2007-08.

We expect labour market slack in the eurozone as a whole to decline gradually in the coming quarters, but not to be exhausted before around the end of 2019.

 

 

 

 

Wage growth in Germany already well above the eurozone level

Wage growth in Germany has been well above the rest of the eurozone since the start of 2010, when a jump in unemployment reduced wage growth in most eurozone countries. On top of that, peripheral countries such as  Greece, Portugal, Italy and Spain experienced  a couple of years of contracting wages. In some of these countries wage growth currently is still only just above zero.

Despite the high level of wage growth in Germany, we expect wage growth in the eurozone as a whole to remain subdued this year and in 2019, although there might be some upward pressure, as higher headline inflation feeds through into higher pay settlements.