Tuesday, March 25, 2008

German Wage Costs Q4 2007

The latest quarterly wages data from the German Federal Statistics Office show that despite the continuing resilience in the German economy (see this last post), hourly wages in Germany are far from keeping up with the rise in inflation.

According to the latest data release, in the fourth quarter of 2007 employers in the industry and service sectors paid a calendar-adjusted 1.1% more per hour worked than in the same quarter a year earlier. It is important to notice here that the two main components of labour costs showed slightly different trends. While the costs of gross wages and salaries were up 1.5%, non-wage costs were down 0.4%. Compared with the previous quarter, the costs of one hour worked increased a seasonally and calendar-adjusted 0.4%.

In 2007, labour costs in the industry and in service sectors increased a calendar-adjusted 0.9% over the previous year. The index of gross wages and salaries was up by 1.3%. By contrast, the index of non-wage costs decreased 0.5%. The decrease is due to the reduction in employers’ contribution rates for unemployment insurance (from 3.25% in 2006 to 2.1% from 2007) a decrease which more than offset the increase in employers’ contribution rates for statutory health insurance (up from 6.6% to 7.0%) and for pension insurance (up from 9.75% to 9.95%) in 2007. The basic philosophy behind this restructuring was a to make some sort of trade-off between a VAT rise and a reduction in the contributions wedge on wages in an attempt to create employment (which obviously has to some extent worked on the employment side, although it clearly has not worked on the household consumption and CPI side).

What all this means in practice is that the German total wage cost increase data for 2007 is somewhat lower than the actually underlying wages only trend, and this will be noticed in Q1 2008 as the base effect drops out. But still, if the trend is 1.3% rather than 0.9%, this hardly constitutes a wages explosion. The question is why it should be that growth is being sustained, unemployment is falling, and yet real wages are alos falling. I think I offer some part of the explanation in this post here, and the fact that a very similar state of affairs now exists in Japan would seem to reinforce my argument (and this post here).

Also the latest quarterly data from Eurostat - which uses a slightly different methodology - shows that among the EU Member States for which data were available for the fourth quarter of 2007 the smallest annual increases in hourly labour costs were observed in Luxembourg (1.0%) and Germany (1.5%), ie that Germany had the second lowest, and a far far cry from the other end of the scale, since the highest annual rises were registered in Latvia (30.1%), Romania (21.6%), Estonia (20.7%) and Lithuania (20.5%).

Germans are feeling the pinch. Although the country's economy has been growing steadily in recent years, the man in the street is, in fact, worse off, as average incomes have failed to keep up with inflation. In fact real wages - which I have derived by simply subtracting the CPI rate from the wages data - have been negative since at least the start of 2006, ie through virtually the whole of the current expansion.

This picture is also confirmed by new figures released by the Finance Ministry last week, which showed that over the last three years prices have been rising faster than disposables incomes - and that the drop in real wages has been accelerating.

The figures, which were released by the government in response to an inquiry from the opposition Free Democratic Party (FDP), show the average worker is getting worse off at an increasing rate. Published in last Friday's Süddeutsche Zeitung, the numbers basically show that an average family with two children was 0.4 percent richer in 2004 compared to the previous year. However, in 2005 and 2006 average disposable incomes fell by 1.1 percent. Last year, the fall increased to 1.3 percent. Workers without families suffered similar falls in income.

Of course, the idea that their purchasing power is declining won't come as any great surprise to most Germans. Relative to one year ago, prices for a number of goods and services have risen drastically. Petrol prices have shot up by 10 percent with diesel rising by 16 percent relative to Feb. 2007. Electricity is likewise 7 percent more expensive and natural gas prices are set to rise in April. Even a bag of groceries costs on average 7.8 percent more than a year ago according to the Federal Statistics Office who said last Friday that the inflation rate hit - as measured by the EU harmonised index was up by 2.9% percent in February.

The bad news comes on the heels of a report by the German Institute for Economic Research that Germany's middle class is continuing to shrink. Whereas the group made up a solid 62 percent of German society for decades, only 54 percent are now considered to be middle class.

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