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German wages to rise but restraint still rules

BERLIN (Reuters) - Bolstered by firm trade union coordination, paychecks in Germany will rise more this year than last, but not at the expense of the country’s famed wage restraint and competitive edge.

The rises -- expected to outpace inflation -- should only briefly ease the growing competitiveness gap between Europe’s largest economy and its peers.

Wages for some 9 million workers are up for negotiation this year, with the biggest bloc led by powerful manufacturing union IG Metall which is seeking a 6.5 percent hike for three million people.

Precedent suggests they’ll probably get just over half that, putting the average negotiated raise for 2012 above both last year’s 1.5 percent gain and an expected euro zone inflation rate of some 1.7 percent.

But with employment linked to a fickle economic cycle, union membership declining and the emphasis on job security, restraint in German pay rises is here to stay for the foreseeable future.

“Wage restraint is not coming to an end - pay this year is just catching up,” said Commerzbank economist Eckart Tuchtfeld, who forecasts negotiated wages to rise 2.75 percent in 2012.

“Every now and again the unions have to deliver, but high wage rises will remain the exception in Germany,” he added.

Years of subdued pay growth helped put Germany’s economy on its current pedestal. After record levels of joblessness which peaked in 2005, labor market reforms boosted competitiveness and increased employment which now stands at its highest level in German history.

The same was not true of the wider euro zone, where rising wages consistently outpaced German pay increases, fueling the economic divergence that is a sub-plot of Europe’s debt crisis.


A broader measure of overall pay from the Organisation for Economic Cooperation and Development (OECD) shows that real compensation has actually fallen in Germany since the birth of the single currency.

And over the period leading up to the financial crisis when Berlin was actively pushing for wage restraint (2000-2007), nominal compensation grew a mere 1 percent on average, compared to 2.7 percent in the combined euro zone.

OECD economist Felix Huefner says that while Germany may feel less pressure to boost competitiveness in the years ahead compared with the days when unemployment was rife, little stands in the way of continued moderation when it comes to pay.

“As long as German employers continue to play out globalization, and there’s always a possibility to move production to countries in Eastern Europe with lower labor costs, I don’t see any dramatic change in the cards,” he said.

The OECD data suggests compensation in Germany will grow a mere 0.3 percent in real terms in 2012, again undercutting the euro zone average, seen at 0.4 percent for the period.

That would strengthen Germany’s export-based economy but possibly annoy weaker countries that share the euro currency and therefore monetary policy. They point to low German pay growth as a factor behind subdued demand for their own goods.

Demand-side economists and even some advisers to the German government have repeatedly called for higher wage hikes -- this year especially -- to stimulate household consumption and drive imports.

But others have said that Germans, traditionally more likely to save than spend, would not consume significantly more even with higher wages, let alone enough to help bolster growth in peripheral euro zone partners.

Consumption may be edging up slightly, but for now neither it nor the pay model look ready to change dramatically.

A projection of relative export prices -- a measure of competitiveness by the OECD -- shows Germany beating all euro zone members except for crisis-hit Spain and Ireland this year, with the lead widening in the years ahead.

Writing by Brian Rohan. Editing by Jeremy Gaunt.