Letter from Berlin Despite Boom, Little Hope of Big Pay Hikes in Germany

After years of restraint, German trade unions have a strong case for demanding big pay increases in the current boom. Much of Europe hopes they will succeed because this could lessen German competitiveness and boost its imports. But for many workers, hopes of a pay bonanza are likely to be dashed.

A steel worker at ThyssenKrupp: The steel sector is pushing for a 6 percent pay hike.

A steel worker at ThyssenKrupp: The steel sector is pushing for a 6 percent pay hike.

It is a well known ritual. Germany's business leaders always start pay negotiations by insisting that trade unions must show restraint in order to preserve corporate competitiveness and safeguard jobs. But at a time when Germany is enjoying its strongest boom since unification in 1990 and companies can't keep up with foreign demand for their goods, their mantra is ringing hollow. Even Chancellor Angela Merkel says it's time for employees to get a piece of the pie. She said she hoped "the improved situation of companies will be reflected for employees."

Germany's trade unions are even getting support from abroad. French Finance Minister Christine Lagarde says the whole euro zone could profit from a rise in German incomes. Admittedly, Madame Lagarde is likely to be pursuing French domestic interests in this respect. German companies owe their competitiveness and success in foreign markets in part to years of wage restraint by their workers. Wages rose significantly more in France and other countries (see graphic). Now Lagarde appears to be hoping that this competitive disadvantage will lessen if Germany's trade unions push through decent wage hikes.

German companies do indeed have more scope for pay rises than they have had for years. Many are recovering fast from the global financial crisis of 2008 and 2009. The automakers and engineering firms are working at full throttle and chemical firms are bringing mothballed plants back into operation.

Many economists expect GDP growth of around 2 percent this year, and a broad spectrum of politicians and trade unionists are convinced that employees should be rewarded for having foregone pay hikes in recent years in a bid to safeguard their jobs. "It's our turn again now," says Michael Sommer, the head of the DGB Trade Union Federation.

Steel Workers Want 6 Percent

Engineering union IG Metall is demanding a 6 percent pay hike for steel workers this year in talks that opened on Monday. In the past, such a hefty claim would have provoked an outcry. Not so this year. It is common knowledge by now that German workers, in terms of their demands, "are among the world's more restrained,"wrote business daily Handelsblatt. Adjusted for inflation, incomes have been falling here for years. They even fell in the so-called boom years between 2004 and 2008.

After the global crisis erupted in 2008, many workforces accepted pay cuts to save their jobs. Many went on government-subsidized short-time working schemes or agreed to have their holiday and Christmas bonus payouts scrapped. There is hardly any other nation whose workers responded to the financial crisis with such readiness to forego pay.

Take the automaker Daimler, for example. Part of its workforce was put on short time, the others had their working hours reduced by 8.75 percent with commensurate cuts in pay. An agreed pay hike was postponed from May to October. The workforce also agreed to a nine-month delay in the payout of a €1,900 profit-sharing bonus for 2008, effectively handing the company a €280 million loan.

Employees enabled the big companies to achieve huge reductions in labor costs. Bodo Uebber, Daimler's chief financial officer, said the group's labor cost savings in 2009 amounted to €1.8 billion.

The Stuttgart-based automaker benefited in two ways from the readiness of its workforce to compromise. Without short-time working and wage cuts, the company would have had to make employees redundant. That would have cost large sums in terms of redundancy packages in 2009. Payroll costs would have fallen in 2010. But this year Daimler, along with a host of other German firms, suddenly needs its employees because demand is surging at a surprising rate in many export markets. Daimler kept its workforce intact and now has the capacity to satisfy that demand by rapidly ramping up output.

CEO Pay Rose 10 Percent During Crisis

So there are strong arguments for significant pay hikes, especially given that CEOs continued to enjoy salary increases throughout the crisis. It is true that Daimler CEO Dieter Zetsche took a pay cut of almost 30 percent. But other bosses didn't follow his example. Towers Watson, a consultancy firm, calculated that the average remuneration of the CEOs of the 29 blue chip firms listed in Germany's DAX stock market index rose by 10 percent to €3.6 million.

Against this backdrop, trade unions should have little trouble securing pay hikes in the coming negotiations. They have particularly strong muscles in the steel industry, which consists of just a handful of big companies and where some 90 percent of employees are members of the IG Metall trade union. A good pay deal for steel workers would be an overdue reminder of union power after years of accepting real income cuts. But it won't serve as a signal for other industries. The steel industry talks only affect some 85,000 workers, a fraction of the 3.4 million employed in the metalworking industries represented by IG Metall. The wage deals for most IG Metall members run until 2012 and include a 2.7 percent rise in April 2011.

Meanwhile services sector trade union Ver.di, whose chairman Frank Bsirske is known as a tough negotiator, isn't getting its members' hopes up -- it has little prospect of achieving big gains in upcoming talks with public sector employers. Ver.di can't seize on the economic recovery because other criteria apply for a public sector plagued by record government debt, empty coffers and a rigid austerity program.

After years of moderation, trade union members in all sectors are pressuring their leaders to go for big hikes. That is partly because pay gains in recent years often took the form of one-off payments that didn't raise salary levels. As a result, salaries that serve as a basis for current talks have been kept little changed for a long time.

Bad Timing

Pay talks in the chemicals sector start in spring 2011. There are fears, however, that the current boom may not last that long, because important export markets could run into trouble in coming months. China's real estate bubble may burst, there are fears of a US slowdown, the banking crisis isn't over yet and it's still uncertain whether Greece, Italy, Portugal and other countries will overcome their debt problems.

All these economic risks highlight a classic dilemma for trade unions -- if one follows the logic of the employers, it's never really the right time for strong wage increases.

In times of crisis, employees are forced to forego increases in order to protect their jobs. And when the economy starts recovering again, unions are under pressure not to choke off the upturn with excessive demands. Or there aren't any wage talks pending, as is the case for most IG Metall members. And when the recovery is firm and strong, the dark clouds of the next crisis are usually on the horizon. Then the mantra of business leaders suddenly finds followers again.


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