The FINANCIAL — Labor costs in Germany rose sharply in the first quarter of the year in an accelerating trend that is starting to hurt companies’ profit margins and may eventually trim their competitive edge in global markets, according to Nasdaq.
Labor costs, per hour worked, rose 1.1% on the quarter and 3.2% from the year-earlier period, the federal statistics office, Destatis, said on June 9. That is the highest annual increase since the first quarter of 2013.
“The time of ultralow wage increases is over” and Europe’s largest economy could be paying dearly for it in a few years’ time, said Joerg Kraemer, chief economist at Commerzbank.
Far-reaching labor market reforms of the early 2000s turned Germany from Europe’s so-called ‘sick man’ into a regional role model. Unemployment in the country is the lowest in the entire eurozone; and wage restraint coupled with short-time work has helped the economy quickly emerge from its 2009 recession.
This has fueled confidence among big labor unions to press for higher wages despite super low rates of inflation, with large-scale walkouts in industry and services disrupting business and trade in recent months.
On June 8, postal workers started an open-ended strike, after the sixth round of wage talks ended without results.
Destatis said that gross wages in the first quarter were up 2.9% from the year-earlier period—the sharpest increase since the first quarter of 2013. By comparison, consumer prices in the first quarter were roughly unchanged from a year ago.
Corporate profit margins, although still high, are coming under pressure because firms aren’t able to raise their prices as much as needed to compensate for rising labor costs, according to Commerzbank research.
Meanwhile, other eurozone economies—especially those on the periphery—are narrowing the competitiveness gap with Germany. Indicators from the Organization for Economic Cooperation and Development show that German labor productivity has moved sideways since early 2011, while productivity in Spain increased significantly.
Destatis said on June 9 that German labor cost inflation in industry and services ran at 1.7% in 2014—well above the eurozone average of 1.2%. Labor costs fell in Ireland, Portugal and Greece and increased by 0.5% in both Italy and Spain, it said.
These trends are likely to be welcomed in Europe and beyond. Higher incomes in Germany should provide additional support for consumer spending and give other eurozone countries a bigger market for their exports. This would also help Spain, France and others to regain competitiveness without having to resort to painful wage and price cuts.
And so far Germany doesn’t appear to be feeling the ill effects of higher labor costs on their exports, as the weaker value of the euro has made its products cheaper in global markets. Germany’s trade surplus swelled to €22.3 billion ($24.74 billion) in April—its highest level on record—propelled by strong exports, Destatis said on June 8.
Yet analysts have warned that some of the government’s recent policy initiatives—such as the introduction of a €8.50 minimum wage and changes to the collective bargaining rules—could create problems down the road.
“Germany won’t rise like a phoenix from the ashes out of the next recession—like it did in 2009. It will come out weakened,” Mr. Kraemer said.
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