This page has been archived and commenting is disabled.

Under-Appreciated German and Japanese Wage Developments

Marc To Market's picture




 

Last week more than 3/4 a million state workers in Germany won a 5.6% wage increase over a 2-year contract. Today I.G. Metall, the largest and most important private sector union, confirmed that at negotiations the begin on March 19, it will seek a 5.5% wage increase over the next year. Separately, large Japanese companies have indicated willingness to grant higher wages and/or bonuses as the spring labor negotiations get under way.

It is, of course, easy to succumb to the cynical view that the civil servant wage increase in Germany is an election year ploy. Last year's pay hike for municipal workers did not in fact carry over and boost Merkel's CDU in the numerous state elections last year. Simply put, the situation is much more complicated.

Real wages rose in Germany rose for the third consecutive 2012 and appear set to do so again here in 2013. Look at the quarterly pattern of nominal wage increases in Germany last year: 2.1% in Q1, 2.5% in Q2, 3.0% in Q3 and 3.2% in Q4.

Private sector wages increases have little to do with any purported government electioneering. Last year, I.G. Metall sought a 6.5% increase, but in the end accepted a 4.3% increase covering 13 months--which at some 7 bln euros, was the biggest award in two decades.

Yes, the employers association (Gesamtmetall) will push back against the 5.5% demand. It argues that output fell last year and only a small increase is likely this year. The employees are seeking to recoup some of the ground lost to inflation and productivity growth after years of wage restraint. Warning strikes--limited industrial action-- is possible in the coming weeks.

The significance of higher German wages is difficult to exaggerate. An increase in disposable income may help fuel domestic demand. Recall Germany, like China, exports around 40% of GDP. China is under pressure to rebalance its economy toward domestic consumption. Some argue this is a natural development. Yet Germany, a mature high income country, has yet to make that transition. Weaker growth in the European periphery and many emerging markets may force Germany to rely more on the demand it can create domestically.

Separately, but just as importantly, higher German wages can be an important part of the adjustment process in Europe. The pressure has been on peripheral countries (and France) to boost competitiveness by reducing unit labor costs. Where this has been done (not in Italy or France) it has been concentrated in the public sector with job, wage and benefit cuts. However, the increase in German unit labor costs, all told quite modest, does take some pressures off the peripheral countries have to bear the sole burden of the adjust process.

These wage developments, coupled with the OMT and EU efforts that encourage less draconian austerity (by giving at least some countries extra time to reduce the deficit and allow productive public sector investment), reinforce the idea that European officials--not just the ECB--are continued to reduce the risk disintegration of EMU.

Over in Japan, auto makers and other large companies are raising wages and/or bonuses in the spring round of labor negotiations. Toyota, for example, recently agreed to the largest pay increase in five years. It granted a bonus equivalent to 5-months average salary and an extra JPY300k payment. The average pay out is JPY2.05 mln (~$21.4k). Bonuses at Nissan were equivalent to 5.5 months of salary with an average payout of JPY2.04 mln.

It is hoped that such wage developments in Japan can help accomplish two things. First, it is thought that higher wages can help boost domestic consumption. It would seem to make sense. However, it remains to be proven as the small living spaces and culture suggests that the Japanese household is not about to "shop until they drop" as Americans are thought to do. In addition, the propensity to consume in Japan is extremely stable. It is possibly that under the watchful eye of the archetype Mrs Watanabe, who manages household finances, may look to boost financial assets rather than consumption.

Second, to the extent that businesses seek to pass on the higher wage will to customers it may help the new BOJ arrest deflation. This too has to be seen as Japanese business traditionally compete by retaining market share when faced with an price shock.

We have argued that the real challenge post-crisis is to generate aggregate demand. Export oriented strategies borrow from other countries' aggregate demand. We see real wage growth helping, even if on the margins, to boost demand. At the same time, real wage growth also is an important way to redress the growing inequality that has reached unprecedented proportions and undermines not just the broader economy, but the political center as well.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 03/15/2013 - 20:51 | 3334079 Marc To Market
Marc To Market's picture

Davidsmith--the worldwide economy is bankrupt has no meaning. An economy cannot go bankrupt.  Only governments, housseholds, businesses and individuals.  An economy has debtors and creditors.  There is no worldwide economy that can go bankrupt--that cannot pay its debt.  After all for every debtor there is a creditor.  The net sum must be zero.  Are you sure you are commenting on the write blog ?   I do not say higher wages in Germany or Japan ar a panacea.  I do think they are a step in the right direction.  You obvious don't.  Perhaps you should be on the proscription list.  Next ?  

Fri, 03/15/2013 - 14:44 | 3333179 ParkAveFlasher
ParkAveFlasher's picture

Funny, I see "higher aggregate demand" and "higher wages" and think "need more money" and "need more money".

Two words are mentioned only one time in the obfuscatory language of this article: inflation and deflation.

This article says NOTHING. 

Fri, 03/15/2013 - 20:52 | 3333818 Marc To Market
Marc To Market's picture

To the (rude) ParkAve Flasher--Do you read  before you write ?  Did I not say that few appreciate that German and Japanese wage increases are under appreciated.  You think you are dissing me but you prove my point.  German inflation rose 1.5% over the past year.  Tell me where is the deflation?  I say wage increases are important and what do you say?  Higher wages= need more money= nothing.  You not only proved my point but you really say nothing about anything.  

Fri, 03/15/2013 - 14:34 | 3333146 Helvetico
Helvetico's picture

Good luck convincing ZHer's that higher salaries will generate greater demand. This forum has been taken over by idiots spewing the economic bullshit vomited by Douche Limbaugh and the rest of the shills for unregulated capitalism. They'll blame Obama or unionized teachers or some other bogeyman for an economic trend (globalization and automation)that has been decades in the making.

Fri, 03/15/2013 - 15:10 | 3333244 adr
adr's picture

If I make 10% more than I did last year but the price of everything I buy rises 15%, I have actually lost 5% of my purchasing power and therefore can not purchase as much as I once did.

Or is that idiotic economic vomit bullshit?

Fri, 03/15/2013 - 19:22 | 3333811 Marc To Market
Marc To Market's picture

ADR presents a straw man.  I specifically show that German wage increases are exceeding inflation.  His examaple is if inflation exceed wage gains.  

Fri, 03/15/2013 - 13:32 | 3332918 otto skorzeny
otto skorzeny's picture

nice wage increases-the only employees in the US that get that big of a bump are our hard-working civil servants

Fri, 03/15/2013 - 13:01 | 3332832 davidsmith
davidsmith's picture

"We have argued that the real challenge post-crisis is to generate aggregate demand."

 

The problem is not aggregate demand.  The problem is fascist looting of the society.

Fri, 03/15/2013 - 12:48 | 3332784 supermaxedout
supermaxedout's picture

Labor cost do play a smaller and smaller role in the German export oriented industry. Energy costs and raw matertial cost are much more important in this sector due to the high standard of automated and robotic production. So these increases are of greater importance for the local service industry and the small businesses and the public employers. Since tax revenues were also the third year on a record high the public employers like states and municipalities can afford it too.   For the small business there exists in general no minimum wage requirement they only have to pay what the labour markets asks for. And the market asks for more since labour is in short supply already in Germany. 

Fri, 03/15/2013 - 20:45 | 3334071 Marc To Market
Marc To Market's picture

Fully agree, which is why I wrote earlier in the week about the debate over a minimum wage or a wage floor for the workers not covered by industry agreements.   The ability of employers to pay higher wages, it seems to me, is rarely the main obstacle to higher wages--private or public sectors.  It is more willingness than ability.  Also, when it comes to government workers and service sector workers labor costs are more significant and that is a large part of the economy.  

Fri, 03/15/2013 - 12:46 | 3332776 WhiteNight123129
WhiteNight123129's picture

Good post

 

Fri, 03/15/2013 - 12:00 | 3332625 SmittyinLA
SmittyinLA's picture

The shop till ya drop culture is over 

Fri, 03/15/2013 - 11:40 | 3332561 suteibu
suteibu's picture

There simply will not be enough workers in Japan who will receive these wage increases to make a difference.  ~40% of the workforce is part time or otherwise underemployed and not all full time workers will get any.  The overemphasis on exporters has led to policies that drag on the greater economy.  While the weaker Yen is benefiting the exporters, the importers and domestic economy is taking a beating.  The poor and lower middle class are being squeezed and will ultimately pay the price to prop up the uncompetitive Japan, Inc.

Fri, 03/15/2013 - 13:34 | 3332922 otto skorzeny
otto skorzeny's picture

the last 2/3 of your post could refer to the US as well

Fri, 03/15/2013 - 10:11 | 3332201 BlueCheeseBandit
BlueCheeseBandit's picture

"We have argued that the real challenge post-crisis is to generate aggregate demand."

Just lost a lot of credibility, Mr. Keynes.

Fri, 03/15/2013 - 20:47 | 3334075 Marc To Market
Marc To Market's picture

BlueCheeseBandit--have you read keynes yourself ?  Have you read other economists ?  Did Keynes make up the concept of aggregate demand?  Can one use that concept without name calling to dismiss an argument?  

Fri, 03/15/2013 - 14:06 | 3333045 lolmao500
lolmao500's picture

Good luck creating aggregate demand when everybody is totally bankrupt.

Fri, 03/15/2013 - 20:56 | 3334098 Marc To Market
Marc To Market's picture

Pray tell lolmao500 have can every one be bankrupt.  How can every one be a debtor?   Have you now heard about the massive unequal distribution of wealth and income ?   You of course have the right to express your own opinion, but this is a factual claim.  Perhaps it would help if you thought through your slogans before you confuse them for an argument.  The piece, in case you hadn't read it, discussed substantial wage increase in Germany and Japan.  Will that increase demand?  I say on the margin yes.  And you say what?  Good luck.  Huh ? 

Fri, 03/15/2013 - 14:37 | 3333155 davidsmith
davidsmith's picture

Amen!  The worldwide economy is bankrupt many times over but aggregate demand is increasing.  Marc to Market is Pollyanna, living in a quasifascist dreamland.  Put him on the proscription list.  Next?

Do NOT follow this link or you will be banned from the site!