A mixed bag for pay rises in 2022

After 2021, a year when wage negotiations were difficult against a backdrop of a fragile and uneven economic recovery, wage increases should be much higher in 2022 but insufficient to compensate workers for high inflation. The country’s most powerful union, IG Metall, has obtained a wage increase which has not been seen in the metalworking sector for 30 years: +6.5%. However, this increase should be put in perspective, since the agreement covers 18 months, bringing the annual growth rate to +4.5% in 2022.

Salary negotiations in Germany are still mostly carried out at a centralised level (by industry or sector). The shift in decentralization in the 1990s mainly enabled enterprises to break out of sectoral agreements in exceptional circumstances (e.g. financial difficulties of enterprises, or unfavourable economic conditions).

The German Trade Union Confederation (DGB), a pillar of German trade unions, centralises the majority of trade union bodies and brings together almost 6 million members. DGB is dominated by two major union powers: IG Metall (metallurgy and textiles) and Ver.Di (transport, trade, banking and insurance).

Germany: labour costs and wages dynamic in private sector

Collective bargaining was particularly difficult in 2021 in Germany. Despite the pugnacity of trade unions that negotiated agreements over a long period of time, the unfavourable circumstances linked to the two years of the Covid-19 pandemic prevented wages from growing significantly. On average, negotiated wages have risen by only 1.7%, the lowest since 2006, according to the Hans-Böckler Foundation’s Institute of Economic and Social Research (WSI).¹

This weak dynamic can also be explained by the fact that 2021 was marked by the exceptional distribution of bonuses rather than salary reviews. In a context of uneven economic recovery between sectors, companies preferred to maintain flexibility by awarding employees “Corona bonuses” (Corona-Prämie), as WSI called them in its annual report. These one-off bonuses, amounting to a maximum of EUR 1,500 per employee, were exempt from tax until March 2022. In practice, the bonuses that were awarded averaged EUR 500, ranging from EUR 90 in the confectionery industry to €1,300 in the public sector.

Inflation should erode even large wage increases in 2022

At the beginning, 2022 should have been a good year for salary negotiations². Provisional agreements for the year were favourable to employees, given the post-Covid recovery and growing tensions in the labour market. WSI’s annual report, published at the end of 2021, stated that the context of a "strong economic recovery and shortages of skilled labour in many sectors would create favourable conditions for substantial salary increases. Employees expect their purchasing power to increase in 2022". Several sectors had negotiated significant increases, often complemented by bonuses such as in 2021: accommodation (rise between +4% and 6% depending on grade), transport (from 1.5% to 5%), and construction (+2% to +3%).

However, the rapid and severe deterioration of the economic environment has set back a large number of trade union organisations. The slowdown in activity will weigh on employees’ bargaining power, while they would like to negotiate larger-than-expected salary increases to preserve their purchasing power in the face of inflation, which should reach an annual average of just over 8% in 2022.

After a strike, the most powerful German union, IG Metall, achieved salary increases for metalworkers of +6.5% on 15 June, starting in August over the next 18 months. It follows negotiations in the textile sector where IG Metall obtained a +5.6% increase in wages at the beginning of May. Although this is the biggest rise in 30 years in the metalworking sector, the increase should be seen in perspective, since the agreement covers 18 months, bringing the annual growth rate to +4.5% in 2022. Not forgetting that workers' basic wages did not increase last year as they were offset by bonuses. So, the growth in negotiated wages is not so high as it will be calculated in relation to the base salary which has been unchanged since 2020 (and not in relation to the total compensation which includes the bonuses which were very important last year). And it is important to note that salaries’ increases in other sectors are expected to be smaller because IG Metall has more bargaining power than other, smaller trade unions.

More than just a helping hand, the historic rise in the minimum wage will preserve the purchasing power of the lowest income households

With net purchasing power increasing this year, workers paid the minimum wage or close to it will be an exception. Indeed, they will see their purchasing power improve thanks to the substantial increase in the minimum wage, which will reach EUR 12 per hour in October 2022 (chart 2) after an initial increase in July to EUR 10.45 per hour, compared with EUR 9.82 currently (i.e. an increase in total of 22%).

However, not all salaried employees paid the sectoral minimum wage will be directly affected by this pay rise, given that the minimum wage is already over EUR 12 per hour in a certain number of sectors. Nevertheless, the increase in the minimum wage should generate knock-on effects for wages close to the minimum ³ and, therefore, increase the wage of a significant number of employees in the first deciles of income distribution.⁴ The sectors that will see their minimum increase are essentially sectors in which the most vulnerable workers are found: temp agencies, cleaning agencies, farming and building trades (chart 3).

Wage increases too small to fuel domestic inflation

Although real wage growth is expected to be negative in 2022, the magnitude of nominal wage increases raises the question whether it could trigger a feedback loop between wages and prices. Theoretically, to be in line with the European Central Bank’s inflation target, nominal wages can increase by +3% per year since the increase in labour productivity (+1% per year on average in the long term) will limit the increase in unit labour costs to +2% per year.⁵

In Germany, the salary increases negotiated in 2022 seem high due to a significant base effect: since employees were mainly rewarded through bonuses last year, the salary scales hardly rose in 2021. .

In fact, part of the wage increases will be eroded by the decrease in bonuses that were paid as an exception last year. Total compensation for employees will therefore increase more moderately in 2022 than what the agreements suggest

Unit wage costs, which take into account total remuneration and are adjusted for productivity gains, should rise more moderately than wages (in the region of 3% in 2022), thereby limiting the upward pressure on company costs and hence inflation. The data available for Q1 2022 seem to confirm this : while salaries in the private sector increased by +5% y/y, unit wage costs only increased by +1.8% y/y (chart 1).

The negotiating power of employees has shrunk as economic conditions have deteriorated. While they were in a strong position at the end of last year, with forecast GDP growth of over 4%,⁶ the drop in activity and profits expected by companies strengthened the bargaining power of employers’ unions, leading to less generous agreements. The decline in turnover in many sectors, particularly industrial sectors, has also enabled companies in difficulty to exclude themselves from agreements and to freeze salaries.

It can therefore be concluded that at this stage wage dynamics in Germany are not large enough to fuel cost inflation.

In order to understand the context in which these wage negotiations take place, it is necessary to consider how German trade unions are structured and how wages are set.