Bundesbank expects strong wage growth

According to the current issue of its Monthly Report, the Bundesbank is expecting sharp wage increases in future. In this issue, the Bank’s experts find that wage growth in Germany has not kept pace with the rapid economic recovery following the 2008-09 financial crisis. The authors note that, given the strong growth in employment, coupled with low unemployment and high demand for labour, greater wage growth would have been expected.

Wage growth at odds with demand for labour

Chart: Negotiated pay rates and actual earnings in Germany
Developments in consumer prices in Germany, France and the United States from 1960 to today
Wages rose by 2.7% per year on an average of the period from 2014 to 2017, which, by historical standards, is more than in the two periods of expansion prior to the Great Recession, with the averages between 1997 and 2000 and between 2004 and 2007 amounting to 2% and a mere 0.6% respectively. Hourly wages in Germany also grew more sharply than in other euro area countries, where they have grown on average by only 1% since 2014. Thus, these comparisons do not point to unusually weak wage growth in Germany.

However, the moderate nominal wage growth in Germany is, taken in isolation, at odds with the extremely high demand for labour. With the help of economic models, the Bundesbank’s experts throw the finding of only moderate wage growth in recent years into greater relief, noting that analyses using the Beveridge curve and the Phillips curve paint a picture of perceptibly dampened wage dynamics.

The authors explain that several factors have subdued wage growth, including low inflation in 2015 and 2016 and the relatively modest rise in productivity. Furthermore, pay agreements that offered, for example, the choice between a wage increase and more leisure time also presumably had an effect on wage growth, they reason, albeit one that is difficult to quantify. According to the authors, the greatest influencing factor has been the inflow of workers from other EU countries.

Strong immigration from other EU countries

Following the introduction of the full freedom of movement of workers in the European Union in 2011, around 1.8 million potential workers had moved to Germany by mid-2017, particularly from central, southern and eastern EU countries. In recent years, immigrants have for the most part taken up employment in sectors and fields of activity that tend to have a below-average wage level.

In 2017, for example, they predominantly worked as unskilled or skilled workers in the fields of agriculture, temporary agency employment, hotels and restaurants, construction, and transportation and storage. The Bundesbank’s experts find that the dampening effect on wage growth is attributable in large part to the relatively low wages immigrants earned themselves, rather than being due to immigration pushing down the wages of domestic workers.

Higher wage growth expected

According to the Bundesbank’s experts, it is assumed that the wage level of immigrants, as well as the wage level in general, will increase considerably as immigrant workers become better integrated into the German labour market. From today’s perspective, they explain, it is likely, in view of the underlying economic conditions, that nominal negotiated rates of pay will be higher in future than they have been in recent years, adding that the gradual rise in the rate of inflation is likely to boost wage growth. Moreover, they point out that the economic outlook continues to be favourable, with the result that, in the coming years, labour market tightness will be reflected to a greater extent in actual wage developments.