Deconstructing the German public sector wage agreement

Reading today’s newspapers, one could get the impression that the 1970s are back in Germany. “9 percent more for the public sector” writes FT Deutschland. Wolfgang Munchau and Susanne Mundschenk in their Eurointelligence news briefing sound similarly gloomy when they title “The second round effect arrived yesterday” and write about a “8% pay rise stretched over two years”.

However, looking more in detail into the wage agreement (available in German at the public sector’s union’s website) shows that these numbers look much more impressive than they are. In fact, if this pay deal were to be applied to the whole economy, unit labour costs would not increase by more than 2 percent (the ECB’s inflation target) annually for the period 2008 and 2009.

So let’s have a look at the details for the Western part of Germany (where the largest part of public sector employers live):

  • For 2008, public sector wages will increase by 50 € a months plus 3.1 percent. For the earners with the lowest incomes for which this deal applies (earning about 1600 € per month before taxes), this translates into a pay rise of 6.6 percent for this year. For the earners with the top incomes (earning 5850 € per month before taxes), this translates to a pay rise of 4.0 percent.
  • The weekly working time will be increased by half an hour starting this hour to 39 from 38.5 hours without additional pay.
  • In 2009, public sector wages will increase by an additional 2.8 percent. Moreover, in January 2009, a one-off-payment of 225 € will be made.
  • The wage contract runs until December 31, 2009, with new negotiations likely in early 2010.

Taking into account the increase in working time (an increase by about 1.3 percent), we see that for 2008, the hourly wage in the public sector increases by 2.7 to 5.3 percent, depending on seniority. Taking again into account that not too many employees actually work in the lower paygrades, we see that the figure for the whole sector most likely will be closer to the first than to the second figure and probably clearly below 4 percent.

For 2009, hourly wage costs again will increase by between 3.1 and 3.9 percent, depending on the pay grade and again with the weighted average much closer to the lower end of this range. Moreover, one need to keep in mind that the one-off-payment does not enter into new wage negotiations (which are then due in 2010), meaning that new increases agreed in 2010 will only come on top of an increase of 2.8 percent.

For the east, wage increases in the public sector are somewhat higher, but still far away from the figures published by the papers.

All in all, for both 2008 and 2009 together, the increase in hourly wages in the public sector adds up to about 7 percent. Assuming a productivity increase in Germany of about 1.5 percent annually, this leaves us with an increase in unit labour cost of about 2 percent annually. This is far away from anything problematic. Instead, this is exactly which is a sensible long-run increase in unit labour costs given an inflation target of 2 percent. I would even go further: This wage increase helps getting Germany back into a territory in which it does not continously gain competitiveness vis-à-vis the partners in EMU, a necessary condition for the long-run stability of European Monetary Union.

So why is everyone so concerned about the wage increase? Part of it is just the folklore surrounding wage negotiations in Germany: The unions need to boast about their successes. And the private employers who now criticise vocally the accord prepare for their own wage round and want to make sure that wage demands are not coming in too high.

One can just hope that the central bankers in the euro tower in Frankfurt also understand this Teutonic tradition.

This piece has been co-posted at Eurozone Watch.

One Response to "Deconstructing the German public sector wage agreement"

  1. interested reader   April 1, 2008 at 10:02 pm

    Sound analysis. Finally somebody keeping a cool head.