In election year, German unions eye more robust wage gains

BERLIN Mon Jan 28, 2013 8:44am EST

1 of 3. File photo of employees of DaimlerChrysler chanting slogans during a warning strike organised by Germany's metal and engineering union IG Metall, in Sindelfingen near Stuttgart May 2, 2007.

Credit: Reuters/Michael Dalder/Files

BERLIN (Reuters) - After securing hefty wage hikes last year, German unions are pushing for more inflation-busting raises in 2013, confident politicians will back their demands in an election year even as the economy grinds to a virtual halt.

Another healthy wage increase would help the government show it is doing its part to help struggling southern euro zone partners who are publicly pressing Germany to take steps to boost growth and help drag them out of recession.

But the prospect is worrying some economists, who say Germany risks ceding the competitive advantage it has built up over a decade and stoking inflation further down the road.

Wages of some 12.5 million workers are due for negotiation this year and economists reckon their paychecks will outpace inflation to rise between 2.5 and 4.0 percent. Negotiated wages climbed by an average 2.7 percent in 2012.

"The overall climate should foster higher wage increases," said Eckart Tuchtfeld, an economist at Commerzbank, pointing to the federal election in September and a simmering debate about income inequality in Germany.

Years of wage restraint, combined with labor market reforms, has helped turn Germany - once described as the "sick man of Europe" - into an economic success story.

But German paychecks have begun to creep higher. In 2012 IG Metall, an industrial union which is negotiating for around 4.3 million industrial workers this year, clinched its biggest pay rise in 20 years - a 4.3 percent wage hike over 13 months.

Last week, more than 1,000 IG Metall members dressed in red union t-shirts marched in the western city of Cologne, blowing whistles and brandishing placards which read "More income - we've earned it!". They called for a 5 percent pay rise for nearly 200,000 workers in the wood and plastics industry.

"At IG Metall we don't see any grounds for saying wage restraint is necessary at the moment," said Helga Schwitzer, an executive board member responsible for wage policy.

"The issue of strengthening consumer demand is very important and we think growth is stable enough to be able to cope with a reasonable pay increase."

HELP FROM POLITICIANS

With export weakness likely to weigh on growth this year, Germany could use a wage-induced boost to domestic demand.

More consumption in Germany, whose economy accounts for more than a quarter of euro zone gross domestic product, would answer this month's call by Spanish Prime Minister Mariano Rajoy for the bloc's stronger members to do more to stimulate growth.

By reducing the relative competitiveness of German industry, wage hikes would also help even out economic imbalances within the euro zone.

Last year, members of Chancellor Angela Merkel's centre-right government, led by Labour Minister Ursula von der Leyen and Finance Minister Wolfgang Schaeuble, took the unusual step of publicly calling for big pay rises.

Unions are hoping for more help from Germany's political class this year.

They point to data showing nominal wages grew by an average 1.5 percent per year between 2001 and 2011 - below inflation.

"Without compensation for inflation, we don't have enough money for shopping. And I also don't want to forego my share of productivity and profits," said Klaus Soboll, chairman of the general works council at Huelsta, a furniture manufacturer close to the Dutch border.

Service workers union Verdi is calling for a 6.5 percent pay rise for 765,900 public sector workers at the regional level in negotiations which are due to start at the end of January and which will set the tone for wage rounds in the private sector.

Last year, Verdi secured a wage hike of 6.3 percent over two years for its members at the municipal and federal level. Precedent suggests that unions calling for a 6.5 percent pay rise get a hike of between 3 and 3.5 percent, says Joerg Hinze, of the Hamburg-based HWWI economic research institute.

MEAGRE GROWTH

Peter Bofinger, one of the economic advisers to the government traditionally known as the "wise men", suggests hiking wages by 5 percent this year. Some 3 percent would derive from the rate of inflation and productivity gains, while the other 2 percent would be a euro premium through which Germany helps rebalance the euro zone.

But Bofinger is in the minority. Other economists say offering wage rises above productivity gains would harm Germany, especially at a time when the economy is slowing.

Data from the European Commission shows German labor costs rose faster than the EU average in 2011 for the second time this millennium. They are seen doing so again in 2012 and 2013.

Europe's largest economy grew by just 0.7 percent last year and the government expects meager growth of 0.4 percent in 2013.

Employers are likely to use weak growth as a way to moderate wage demands. Lufthansa (LHAG.DE) managers have already indicated Verdi stands little chance of success with its call for a 5.2 percent pay increase over 12 months for around 33,000 employees of the flagship airline, which faces sluggish growth in its core market and rising fuel prices.

Anton Boerner, head of the BGA trade association, says labor and energy costs are hitting the country's competitive standing, with almost one in 10 companies in the wholesale trade being hit by rivals improving their competitive position.

Dieter Hundt, president of Germany's employers federation, dismisses demands of more than 6 percent as incomprehensible.

"Given projected growth in productivity of 0.6 percent this year, a demand for wages to rise more than 10 times that is certainly not justifiable," he said.

A small group of economists in Germany say bigger paychecks could also push inflation higher in a country still haunted by the hyperinflation of the early 1920s, when prices spiraled out of control, helping Hitler rise to power.

"There are inflationary risks. Until now big injections of liquidity from central banks have not really been able to create inflation because wages were under pressure in many European countries and even in Germany until 2010 or 2011," said Michael Heise, chief economist at Allianz.

"But inflation could quickly accelerate again if high wage hikes are added to high raw material prices."

(Additional reporting by Victoria Bryan and Peter Maushagen in Frankfurt; Writing by Michelle Martin; Editing by Noah Barkin and Catherine Evans)

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