Economics and politics - comment and analysis

Wages and prices in Germany – or why Europe will not escape from deflation in even twenty years. Part 1


This week, which precedes the Day of the Labour movement, May 1st, I want to deal with wage policy. In Germany, the confusion about wages is complete. Nothing shows this any better than recent publications of the Research institute of the association of trade unions, the IMK (Institut for Makrookonomie und Konjunkturforschung). Even the IMK shows no adequate comprehension of the larger picture and is ready to accept deflation as a fact and live with it.

We have all been puzzled for many years about how it is possible that a highly developed country such as Japan found it impossible to escape for decades to escape from the spiral of deflation and low productivity growth. But now we know. A reader sends me a quote from the Suddeutsche Zeitung (SZ) that explains the Japanese misery by using German as an example.

Detlef Esslinger comments on last month‘s latest negotiations between employers and the unions by writing that: „The Deutsche Bundesbank cut its inflation forecast to 0.25% the other day. (…) Employers also recognise that the situation for trade unionists is psychologically difficult. They need to convince their base of the fact that a one percent (in wages) is worth more than a 2.5% four years ago. At that time, inflation was 2%“ (see here).

A 1% increase is worth more today than a 2.5 percent increase at a time when inflation was (at the consumer level ) was still on a path that had been agreed upon at European level! This is just great. It means nothing else than that the ECB’s efforts to bring inflation back to target are pointless from the very outset. Our reader writes: “with this statement, Esslinger also ridicules Ver.di (the union of civil servants and freelancers) among others:  they will not tell workers the truth. Real wages will not rise. What is your opinion about all of this, Mr. Flassbeck?‘

Only two days after Esslinger’s article was published, Heike Göbel, the unquestioned journalist spearhead of the German Employers Association, pleads in the Frankfurter Allgemeine Zeiting (FAZ) for wage adjustment: not upwards but downwards. Her ‚reasoning‘ is that in times without inflation and low productivity growth, current wage demands are beyond good and evil. They are irresponsible and unrealistic. In recent years, German employers already agreed to ‚excessive‘ wage increases in order ‚to defend‘ themselves against a series of ‚unjustified charges‘ that Germany caused the euro crisis because of its wage moderation. Now, however, higher wages are out of the question. Productivity growth is just too low and there is barely inflation anyway. That is the way true lobbyist speaks.

In fact, it seems that the German employers would include public services (here is an indication for this) and made a deal with them to the effect of refusing any increase of nominal wages or, at least, as little as never before. This is consequent and the unions did the same already in the past. They argue, on the basis of the two components in question, current inflation and low productivity growth, and accept these as a given, instead as, as would be appropriate, to advocate for higher inflation targets and medium-term productivity growth.

Now we see how important it was in recent years for employers to consistently deny the reality of German wage dumping and its overall destructive consequences. Many within the union movement participated in this discourse. Just imagine what the German trade unionists have told their counterparts in the other European countries over the years. One recognises the real issue at stake in the comment of Mrs Göbel well enough and it is one that the unions find difficult to disagree with: allegations being made in Germany of wage moderation and wage dumping have been unwarranted. The redistribution in favour of the employers has been perfectly agreeable to the trade unions because without it the great German economic ‚success‘ would have never occurred. In addition, there has, in recent years, been some real wage growth and some redistribution that favour employees. Arguing for bigger wage increases is irresponsible at the moment: it goes beyond what can be ‚distributed‘ without endangering the German success.

Amidst all this incredible confusion the IMK arrives on the stage. Now things become genuinely tragic. The economic research institute from Düsseldorf , which is funded by the unions, published at the end of last week a forecast (see here) that shows that in the current situation (in which there are virtually no price increases), it is possible to let real wages rise significantly without that this would endanger Germany’s competitiveness. The researchers assume a 2.5 % nominal wage increase. With an inflation rate of 0.5%, this clearly leads to an increase in real wages. And given an expected productivity growth for this year of 05%, this means that such a modest nominal increase leads to redistribution in favour of employees.

It is in this context that the IMK comes to the fore in order to explain and advocate the deflationary logic. According to them, German nominal wages rose just as Europe demanded – although ‚while safeguarding German competitiveness.‘ The inflation target was 2% plus productivity growth. Germany did nothing wrong. One has to wonder why the institute does not argue that this time the trade unions should demand a 2.5% increase, then they would be happy and it would be the end of the story.

But this is not happening. The inner logic of this kind of ‚advocacy‘ is clear: redistribution is a relic from the past. Germany’s role in the European crisis? We ignore it! Everything is fine in Germany, international market shares are and remain high, the domestic economy is showing definite signs of improvement and German man proved once again that he belongs to a superior species. Now every other country needs to see for itself where it ends up, European solidarity or not.

Aren’t things really simple when you are getting paid to not understand them? Nothing of this is true. Nothing is great. Europe is facing an ordeal of truly historical dimensions. Yet, the German system of social concertation system (employers, employees and the government) commit themselves to accept deflation as final. There is nothing they can do about it. For as much as there is criticism in policy circles, it is about low interest rates, but this has nothing to do with wages – Japan says hello. One must give credit to the employers and to their media. They once again managed to lure the public, the workers and their representative organisations into a completely unjustified euphoria that unites nearly everyone, except of course the ‘troublemakers,’ those evil men who try to destroy this beautiful and utterly destructive illusion and all the ideology that goes with it.

You can read in the second part what really took place since 1995 and why in the current constellation the trade unions should be assertive and take their vindications to the streets. In the third part, I will explain the origin of the weak productivity growth in Germany.  Weak productivity growth did not fall out of the sky. Tragically enough, it was due to wages.