Tough wage negotiations ahead in Germany

A year ago we published our forecast on Eurozone Watch that after years of decline (see here), unit labour costs in Germany would start to be back on a rising trend after the wage bargaining round in 2007. This forecast has proofed to be almost dead on target. Our model indicated that unit labour costs on a per capita basis would rise by 1.1 % year-over-year in Q4 2007 due to a) a significant tightening in the labour market in the preceding year and b) some of the VAT-induced rise in consumer prices would be passed on to wage increases. In the end, unit labour costs did rise to the tune of 0.8 % y-o-y in Q4 2007. What we did get wrong, though, was that wage settlements were a fair deal more subdued, rising only 2.2 % across all economic sectors rather than our estimated 2.8 %. The difference was made up almost in full by a slower pace of per capita productivity growth as employment rose a lot faster than we dared to estimate in early 2007.   This year’s wage negotiations may turn to be even more interesting with the final outcome to be hugely influenced by the fact that negotiations affecting the biggest chunk of German workers (the metal and electronics round, representing 3.2 million employees) will not start until the end of October 2008.   Given the current uncertainties about the economic outlook in Germany and its knock-on effects on the labour market, this settlement will be of the utmost imporatance. Our take is that the US has entered recession in February 2008 and countries in southern Europe seem to be slowing sharply as the triple whammy from credit crunch, euro appreciation and distinctly higher oil prices are all taking their toll.   So far, Germany seems to weather this storm far better than we would have envisioned. Order books are still sufficiently filled to keep industrial capacity running at full tilt for some months and so far purchasing manager indices are pointing to continued activity levels in Germany quite a bit above the EMU average.   On a Q4/Q4 basis our model points to a growth in German unit labour costs to the tune of 2.8 % in 2008. There is some uncertainty to this projection with regard to the effect of changes in the various social security systems in Germany. On the one hand, there is a significant reduction in the contribution rate to unemployment insurance which is certain to act as a dampener on unit labour costs, on the other, though, this might be completely cancelled out by a rise in contributions to health and care insurance which are currently being debated.   With respect to the corresponding wage increases leading to the aforesaid rise in unit labour costs one can think of two quite different scenarios:   For one, we could see continued real GDP growth in the German economy to the tune of 1.5 to 2 %. This is roughly in line with the current consensus of economic forecasters. If we assume that employment – being a slightly lagging indicator – would continue at a more moderate pace this year, productivity should rise by some 1 % and thus allow wages to grow at a rate of 3.8 % to meet the projected rise in unit labour costs.   Another scenario, which we see as the more likely case, economic and employment growth would falter in the second half of 2008. A weaker economic environment in Europe both due to lagged effects from the US recession and an unwinding of imbalances in the rest of EMU countries are likely to drag down German exports while pockets of domestic strength have not yet gained sufficient momentum to fully compensate for these negatives. Under these circumstances, wage growth should still accelerate somewhat but with productivity stalling the overall increase should be just 2.8 %.   The first pay settlement to be struck for the steel workers right at the start for this year was still fully in line with a) the significant tightening in the labour market over the past two years and b) the solid economic performance at year-end 2007. Wages rose some 5.3 % for a negotiated time-span of 14 months. By contrast the component of one-off payments in this settlement was reduced somewhat relative to the previous round of negotiations. As the complicated arithmetic of wage negotiations goes, this settlement is equivalent to a settlement of 4.2 % on a full-year basis. Subject to this settlement, however, are just 121,000 employees.   When IG Metall starts negotiations for the 3.2 million employees at the end of October, though, orders books may have started to be significantly slimmer than today thus eroding workers’ bargaining power significantly between now and then.   This post has been co-posted at Eurozone Watch.