Pay increases may compensate for falling purchasing power. However, wages will still remain below their 2020 value.
Wages in Germany will rise by 5.6% in 2024, an increase of 3.1% when adjusted for inflation, according to the Institute of Economic and Social Sciences at the Hans Boeckler Foundation (WSI).
The WSI, looking at data from the first half of the year, said on Tuesday that wage increases are set to see the steepest rise in more than a decade.
“This year, the strong real wage increases are, for the first time, significantly compensating for the massive real wage decline in 2021 and 2022 and the small minus in 2023,” said the head of the WSI collective bargaining archive, Professor Dr Thorsten Schulten.
Schulten explained that: “The price-adjusted level of collective wages is still well below the peak value of 2020”, although about half of the purchasing power losses of previous years have been compensated for.
Real wage increases, he argued, therefore “make economic sense in order to stabilise economic development”.
Higher wages notably increase workers’ purchasing power which boosts consumer spending and growth.
The recent inflationary crisis, driven by post-pandemic supply chain disruptions and Russia’s war in Ukraine, diminished disposable income and therefore consumer demand.
In the first half of the year, WSI said that new collective wage deals were agreed for more than eight million employees in Germany.
The group also added that the wages were influenced by IAPs, tax-free one-time payments that employers can give to employees.
The fiscal advantages surrounding these payments mean that employers can reduce labour costs, although Schulten explained that these premiums are “a double-edged sword”.
“On the one hand, they have helped to limit losses in purchasing power in the short term and have ensured particularly high real wage increases this year. However, it is already foreseeable that the elimination of the inflation compensation premiums in 2025 will have a strong dampening effect on the development of collective wages.”
In order to protect against further cost spikes, the European Central Bank will be closely monitoring wage growth to inform interest rate decisions.