Estimated Phillips curves are still good at explaining and forecasting the rate of headline inflation. Source: German Co
Wages and inflation in Germany Professor Dr. Peter Bofinger Universität Würzburg German Council of Economic Experts
German wage moderation is a thing of the past Compensation per employee in G7 countries Annual averages 5 4
Percent
3 2 1 0 -1 -2 2006/2000 Canada
2012/2006 France
Germany
Italy
Japan
United Kingdom
Source: OECD
2017/2012 United States
Euro area
Increasing real wages and unit labour costs Real wages and unit labour costs
Unit labour costs in Germany and ECB inflation target
8 8,0
6 4
6,0
2
4,0
0
2,0
-2
0,0 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
-4 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
-2,0
Compensation per hour (real) Compensation per hour (nominal)
-4,0 Unit labour costs
Unit labour costs
Source: Destatis
ECB Target
Estimated Phillips curves are still good at explaining and forecasting the rate of headline inflation Estimated contributions to consumer price inflation
Estimated contributions to wage growth
2,0
2,0
1,5
1,5
1,0
1,0
0,5
0,5
0,0
0,0
-0,5
-0,5
-1,0
-1,0
-1,5
-1,5
-2,0
-2,0
6,0
6,0
4,0
4,0
2,0
2,0
0,0
0,0
-2,0
-2,0
-4,0
-4,0
-6,0
-6,0
Capacity utilization variables
Forward-lookong inflation expectations
Adaptive inflation expectations
Residual
Capacity utilization variables
Forward-lookong inflation expectations
Import prices
Oil price
Adaptive inflation expectations
Residual
Productivity per hour
Wages
Inflation
Source: German Council of Economic Experts, Annual Report 2017/18
An example for adaptive inflation expectations
2 1,5 1 0,5 0
Negotiated wage increase 2017
Inflation 2017
The problem of „wage moderation for all“ Unit labour costs in the euro area and in Germany (1999=100)
3
150
2,5
140
2
130
1,5
120
1
110
Change in unit labour costs (in %)
ECB Inflation Target
0,5
100
0 2015
90
2016
2017
2018
-0,5 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
80
Germany
Euro area
-1
ECB Inflation Target
Source: AMECO
Germany
Spain
France
Italy
Euro area
2019
Solutions • German wage increases that compensate for wage moderation in other member states are unrealistic • The return to a parity in the financing of contributions to the statutory health insurance envisaged by the coalition partners could provide some relief. Currently employees have to pay a surcharge of about 1 % of gross wages • With a pronounced wage drift and strong employment growth the minimum wage could be adjusted by more than the increase in negotiated wages • Wage moderation in other member states is a dangerous instrument as it makes it difficult to reach the ECB‘s inflation target
