Explaining Double-Digit Wage Claims
ResearchZEW Economist Friedhelm Pfeiffer on Ongoing Wage Bargaining in Germany
Wage bargaining in Germany this year has been conducted with greater intensity than usual. Trade unions demand double-digit wage increases this year – an order of magnitude unthinkable in the recent past. PD Dr. Friedhelm Pfeiffer, deputy head of the “Labour Markets and Social Insurance” Unit at ZEW Mannheim, deliberates the economic reasoning underpinning these demands as well as their likelihood of success on the basis of recent ZEW survey data, inflation expectations, and information from Germany’s Federal Statistical Office.
Friedhelm Pfeiffer comments on his analysis: “It should be noted that all of the economic predictions made and calculated for 2023 are projected values. We will only be able to see the actual figures at the beginning of 2024. The present analysis makes clear, though, that the double-digit wage claims made to date have not been conjured out of thin air. Still, it remains unlikely that these demands will be realised in practice.”
Real gross income for workers in 2022 sunk by 3.1 per cent in comparison to 2021 despite an increase of 3.5 per cent in nominal terms according to recent data from the Federal Statistical Office. Moreover, workers spent a total of 54,162 million hours on the job in 2022, a 1.9 per cent increase from 2021, whereas the number of employed people increased by a mere 1.5 per cent from around 41 million to 41.6 million workers. “Real wages have thus not sunk due to fewer hours worked. Instead, a rise in inflation caused by the war in Ukraine has been the primary driver of this decrease. If workers’ main goal is to counteract this wage decrease in real terms, they should pursue a wage increase of at least 3.1 per cent,” Pfeiffer explains.
Expected inflation decisive for keeping real wages constant in the coming year as well
Should workers want to keep real wages constant also throughout 2023, they would do well to consider the expected inflation rate for the year in their demands. The majority of projections place this expected rate somewhere between 5 and 7 per cent. Assuming the average projected rate of approximately 6 per cent, which corresponds to the expectations of both the German federal government as well as results of surveys amongst financial market experts conducted by ZEW, an additional wage increase of 6 per cent would be required to anticipate inflation in 2023. In total, this would amount to a 9.1 per cent increase.
Longer-term development of real wages and GDP
According to information from the Federal Statistical Office, real gross domestic product (GDP) rose by an average rate of 1 per cent per year between 2011 and 2021. According to ZEW calculations, real wages grew on average by 0.9 per cent per year during the same period. “If workers want to achieve the same rate of increase in real wages, they must ensure that wages rise by a further 1.4 per cent in 2023, i.e. a total of 10.5 per cent,” explains Friedhelm Pfeiffer. The additional 1.4 per cent results from multiplying the cumulative GDP growth of 2022 (plus 1.9 per cent) and 2023 (minus 0.3 per cent according to the expectations of the financial market experts surveyed by ZEW), which together amount to 1.6 per cent, by the desired rate of increase in real wages, 0.9 per cent.
Weighing higher wages against possible employment losses
In wage negotiations, the labour side will have to take into account the impact that a successful wage settlement at around 10.5 per cent in 2023 could have on overall economic employment. Higher wage settlements must be weighed against possible associated job losses. To illustrate the magnitude of possible negative employment effects, Pfeiffer uses an estimate of the wage elasticity of employment that is common in labour market research. According to this, a real wage increase of 1 per cent results in a decrease of 0.3 per cent and, conversely, a real wage decline leads to employment growth of 0.3 per cent. “Under this assumption, as a result of the real wage decrease, employment rose by 0.93 per cent in 2022. With 54,162 million hours worked, this corresponds to an increase of about 504 million hours worked, or about 387,000 employees. This decline in real wages only exacerbated the existing problems of skilled labour shortages in 2022,” says Pfeiffer.
If the wage increase were 3.1 per cent, employment would fall again by that amount under the same circumstances. The additional 6 per cent would stabilise real wages. With all other variables unchanged and inflation at 6 per cent, this would have neither positive nor negative macroeconomic employment effects. A wage increase of 1.4 per cent beyond this would lead to a further decline in employment of about 180,000 jobs in this scenario. In total, 567,000 jobs could be lost as a result of a 10.5 per cent wage growth. This figure roughly corresponds to the increase in employment between the years 2021 and 2022.
Energy price control and welfare development
In this year’s wage negotiations, it should also be taken into account that the Ukraine war has not only driven up energy prices, but the prices of most other goods as well. Since Germany has so far been importing more energy than exporting it, the rise in energy prices in particular has led to welfare losses. If energy imports remain relatively expensive in the longer term, the welfare losses will probably also become permanent. In such a scenario, the labour side would have to weigh whether real wage increases in the order of magnitude seen in the last decade are appropriate. They could argue that real wages have already fallen by more than 1 per cent compared to total economic output in the period between 2011 and 2021, and therefore tend to see a need to catch up. “It can be assumed that higher wages will also make working in Germany more attractive and somewhat counteract the shortage of skilled workers,” Pfeiffer emphasises.
Wage settlements could turn out more moderate
The offer decided by the German government in September 2022 to exempt additional earnings payments by companies of up to 3,000 euros from levies and taxes on a one-off basis could take some of the pressure off wage negotiations. As a result, workers will be left with more net pay for the same gross amount. Moreover, employment could fall more sharply than assumed in the analysis, e.g. if energy prices remain permanently high. This would also increase the willingness to accept more moderate wage settlements. The labour side could also take into account that high wage settlements will further fuel inflation and reduce bargaining leverage in the future.
