How Germany wants to prevent a wage-price spiral

German workers want wages to rise in line with inflation - but there are fears that this could create a cycle of ever-higher prices and ever-higher wages. Here's what the government wants to do about it.

A woman takes a five-euro note out of her purse at the supermarket. Photo: picture alliance/dpa/dpa-Zentralbild | Fernando Gutierrez-Juarez

What’s going on? 

Next Monday, Chancellor Olaf Scholz (SPD) wants to meet with employers and trade unions to discuss the state budget and rising cost of living.

With inflation currently hitting 7.9 percent in Germany, the government is concerned that the trade unions could try to negotiate significant wage increases over the coming months. In some cases, this can fuel a process known as a wage-price spiral – because companies then put up their prices yet again to deal with the rising cost of labour. 

In an effort to stop this happening, Scholz is set to pitch the idea of a one-off pay-rise instead of numerous pay increases over time. The state could make these even more lucrative by keeping the one-off payments tax-free for employees. Scholz’s party, the governing Social Democrats (SPD), believe that this would not only cushion the impact of inflation on workers but also help to prevent endless price hikes in the future.  

READ ALSO: How Germany’s soaring inflation is hitting household budgets

What are the unions and employers saying? 

So far, both unionists and business owners have been cautious about the idea in the run-up to the Monday meeting. Both sides have pointed out that collective bargaining (negotiations between unions and businesses) should be autonomous: wage agreements are not agreed politically, they say, but are a matter for employers and trade unions.

In an interview with the Bayerischer Rundfunk, Frank Werneke, head of Verdi, poured cold water on the idea of one-off payments. “We have to make sure that these permanently rising prices are also converted and transformed into permanently effective wage increases,” he said.

One-off payments are simply one-off measures that do not lead to a permanent increase in wages, according to the IG Metall trade union, which recently negotiated a 6.5 percent pay increase for its workers. The police union has also expressed a similar view. 

Do economists think this is a good idea? 

Not really. The President of the German Institute for Economic Research, Marcel Fratzscher, has already spoken out against the move. He argues that a restricted one-off payment would mean workers would bear the brunt of the current crisis. 

Clemens Fuest, President of the Munich-based Ifo Institute, voiced concerns that even a one-off wage increase could lead to prices shooting up regardless. “There is a danger that this will lead to strong windfall effects and that wage increases will not be much lower (than they otherwise would),” he said. 

Fuest believes that the government should play a role in combatting inflation, but says this could partly be done via the European Central Bank. If the ECB raises interest rates decisively, this will automatically make energy imports cheaper by driving up the value of the euro. 

It’s also worth mentioning that there is some dispute about whether wages are really driving the current cost-of-living crisis. Some economists have argued that prices are going up because companies want to profit from higher margins while certain products are scarce on the global market. This would explain why profits are also high – which would debunk the argument that companies are raising their prices primarily to cover their costs. 

READ ALSO: Is Germany planning more energy relief measures?

What other proposals are on the table? 

Though Scholz appears to have support from the Green Party for his proposal, the SPD’s third coalition partner – the pro-business FDP – has put forward an alternative idea.

Christian Dürr, the FDP’s parliamentary faction leader, thinks adjusting tax rates in line with inflation would be a more sensible option for relieving workers. In any case, there are bound to be intensive negotiations taking place even before the government meets with the unions and employers on Monday. 

Member comments

  1. I think the media and the so called experts are finally catching up with what’s really going on – that companies, especially the big corporates, are profiteering and gouging under the cover and excuse of the war, the pandemic and supply chain problems. Classic inflation is the result of full employment, high salaries and excessive demand. We need a new economic vocabulary for what’s currently happening as even though consumer prices are going up the cause is excessive profits not excessive demand. Fortunately the ECB has not yet raise interest rates so a recession may be avoided (although they plan to raise them in July) whereas both the Fed and the BoE have quite aggressively. A mistaken policy as they have misdiagnosed the illness and are applying the wrong medication and will most likely cause a recession

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Should Germany provide more energy relief to middle-income households?

With the new gas levy arriving this autumn, economists in Germany are calling for a new relief package to support mid-range earners with their energy bills.

Should Germany provide more energy relief to middle-income households?

One idea on the table is to provide an “energy fund” of €100 per person that would be paid out monthly for the next 18 months.

This, according to the president of the German Institute for Economic Research, Marcel Fratzscher, would be the “best instrument” for relieving low- and middle-income households during the energy crisis. 

In October, the government will allow energy suppliers to add a levy of around 2.4 cents per kilowatt hour of gas onto customers’ energy bills. This will see bills for an average 160 square metre family home go up by around €556 per year, while people living in 50-square-metre flats could see their costs rise by around €120-170 annually.

The gas levy is designed to help struggling energy firms recoup the cost of replacing cheap Russian gas, deliveries of which have been dwindling in recent months. In addition, energy companies will be allowed to pass a proportion of future excess costs onto consumers. 

READ ALSO: EXPLAINED: How much will Germany’s gas levy cost you?

With household energy bills likely to triple or even quadruple, economists are arguing that more relief is urgently needed – and not only for those on the lowest incomes.

Chancellor Olaf Scholz (SPD) said last week that the government wants to assist working people who have no savings to fall back on and who cannot easily cope with the increased energy costs.

“This applies to quite a lot of citizens,” Scholz said. “I am concerned with those who earn €2800, €3200 or €4000 gross per month, for whom these are all major challenges.”

According to economist Fratzscher, this group includes more than one in five people in Germany.

Marcel Fratzscher

Marcel Fratzscher, president of the German Institute for Economic Research, speaks at an event in Berlin. Photo: picture alliance/dpa | Bernd von Jutrczenka

“These are mainly people in the low-wage sector, which is unusually large in Germany, and also many pensioners,” he told DPA. They tend not to have savings but at the same time don’t receive support from the state.

For this reason, soaring inflation and high energy bills are likely to hit this middle-income group particularly hard. 

READ ALSO: Germany pledges inflation relief tax package worth €10 billion

“We already have a strong social imbalance among this group as well,” Fratzscher said. “This can be seen, for example, in the increase in the number of people who are over-burdened with debt.” 

“Politicians must now urgently implement a third relief package that relieves this group as a top priority,” he added.

For Sebastian Dullien, scientific director of the Macroeconomic Policy Institute of the Hans Böckler Foundation, a second energy lump sum paid out in December would be the preferred option for relieving households.

This would follow the €300 lump sum in September but also take into account groups that were overlooked in the last energy relief package, such as pensioners who don’t receive housing benefit. 

“Another good option would be to introduce a gas price cap for a basic level of consumption per household,” Dullien told DPA. 

‘Left in the dark’

In the summer press conference last week, Scholz reiterated his plans for a third energy relief package in autumn. However, he has so far refused to give concrete details about the measures included, stating that these are still being discussed within the coalition.

Social organisations are calling on the government to announce any new measures before the gas levy is introduced on October 1st. 

READ ALSO: Germany’s Scholz pledges more relief for lowest earners

“The traffic light government has no time left to argue,” Social Welfare Federation (VdK) president Verena Bentele told the Rhein-Neckar-Zeitung on Wednesday. “We need a solution by September.”

Ursula Engelen-Kefer, vice-president of the German Social Welfare Association (SoVD), told the Neue Osnabrücker Zeitung that the government should roll out support soon to avoid social unrest in autumn.

“We cannot impose more and more burdens on the vast majority of society and at the same time leave them in the dark about how they will be supported,” she said. “It is crucial that the federal government quickly decides on relief measures that will directly reach the people”.