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German Wage Rise Slower Than Employment Rate
World Economy

German Wage Rise Slower Than Employment Rate

The link between wages and unemployment looks broken in a large part of the industrial world’s economy. Not as much in Germany.
Steep declines in the jobless rate in the US and UK have been slow to spur significant pay gains. That’s left economists debating whether the traditional relationship in which tighter labor markets come with higher wages and ultimately inflation—called the Phillips Curve, in wonk parlance—doesn’t work in a globalized economy, Bloomberg reported.
Yet in Germany, where the jobless rate is at a quarter-century low, the chart shows a more classic pattern. So what’s different?
In the US, wages are showing early signs of a pickup if you look at average hourly earnings, but average weekly earnings are still trending sideways. The tepid rebound has puzzled many economists, because unemployment is at levels that many consider consistent with a healthy economy. That should push up wages as companies compete for workers.
The UK situation is similar: Earnings are showing signs of a nascent but halting upturn despite joblessness at a decade low. The Bank of England said in its Inflation Report last month that the trend is “at odds with the continued improvement in other labor-market conditions.’’
In Germany, wages have mostly moved inversely to the unemployment rate.

  The Cause
Why is Germany defying the Phillips curve breakdown? Probably because it’s actually gotten rid of labor market slack, says Jacob Funk Kirkegaard, senior fellow Peterson Institute for International Economics.
“You can honestly say that Germany is at full employment; that argument is difficult to make for the US,” Kirkegaard said. German employment levels are near a record high, but the share of Americans working or looking has fallen to its lowest level since the 1970s. That pool of sidelined labor may keep employers from feeling the pressure to raise wages.
Something similar may be at play in the UK Bank of England Chief Economist Andrew Haldane in a speech last year noted that older workers are showing a willingness to work longer. A perceived extra supply of workers could keep wage gains at bay.
Compared with the US, Germany also has strong labor unions that can push for wage increases, Kirkegaard said.
Alternatively, Germany may just be seeing payback for a breakdown in its Phillips Curve relationship that took place much earlier. Wages in Germany stagnated in the run-up to the financial crisis amid labor-market reforms, so “you could argue that Germany was just the front-runner in lower and flatter Phillips Curves,” said David Milleker, chief economist at Union Investment in Frankfurt.
Also worth noting: While Germany “is maybe one country where the relationship still holds better,” still “it’s a bit surprising that wage growth isn’t picking up faster,’’ said Frederik Ducrozet, an economist at Banque Pictet & Cie SA in Geneva. And even though unemployment stood at its lowest level since reunification as of February, the third leg in the relationship—an inflation rebound—has yet to materialize.

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