The days of excessive German wage restraint are over, as the latest deal at Volkswagen shows. Wages are set to outpace inflation but not productivity. That’s enough to help consumer spending without harming employment. Germany’s European trading partners should cheer.
For years, German wage policies were bad for the euro zone. The latest wage deal at Volkswagen, announced on Tuesday, confirms that era is over.
Until the crisis, average pay in Germany increased slowly, in many years less than consumer prices and productivity. The very slow progress of real wages was great for the cost competitiveness of German exports, but decreased demand for imports from other members of the single currency.
The carmaker’s deal fits with a national pattern. It mirrors an earlier agreement for the country’s metal workers, an important bellwether sector. And that already followed the trend of the preceding two years, when economy-wide wages rose at the fastest pace since 1993.
Salaries of Volkswagen’s 102,000 German workers are set to outpace inflation in both 2013 and 2014. The inflation rate is not expected to rise above 2 percent, while the workers will receive 3.4 percent and 2.2 percent annual increases. The wage trend, along with lower social security contributions, should lead to higher private consumption in Germany. Leading economic think-tanks now forecast increases in real consumer spending of 0.8 percent in 2013 and 1.2 percent in 2014.
Some pundits have called for more aggressive pay rises. Fortunately, the unions have been clever enough not to try to make up for past restraint. The current wage deals, which give workers most of the spoils of increased productivity, will neither destroy nor create employment. Anything more generous could start to price some workers out of their jobs and hurt Volkswagen in the highly competitive global car market.
Increased German unemployment would damage domestic demand. Benefit payments are much lower than wages and the fear of firing drives up precautionary savings. Moreover, the unions would have to use aggressive tactics, quite possibly including long strikes, to win much more generous deals. For the German economy, that would cause significant collateral damage.
Instead, swift negotiations and minimal warning strikes have produced untypically long contracts. German companies and workers seem to have found the right balance between decent pay rises and protecting industrial employment. The rest of the euro zone should be grateful.