German union pay demand of 21% raises inflation fears

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Germany’s construction union has demanded a pay rise of more than 20 per cent for many of the sector’s 930,000 workers, which economists warn could stoke inflation fears and delay interest rate cuts by the European Central Bank.

The IG BAU union on Thursday said it had asked for a monthly wage increase of €500 for construction workers, estimating this would lift pay for the lowest-paid majority of workers by 21 per cent. About two-thirds of German construction workers are paid less than €3,250 a month — close to the minimum wage.

The demand, ahead of talks due to start with employers on February 22 and made on behalf of all of the country’s construction workers, sets a worrying example for ECB policymakers, who have said they want to see signs of wage growth moderating before they will consider cutting borrowing costs.

The move was a sign “something seems to have fundamentally changed in the wage negotiations process”, said Tomasz Wieladek, an economist at investor T Rowe Price, adding it meant “the ECB will need to be much more hawkish than market pricing to bring inflation back to 2 per cent”.

German unions often receive about only half the total wage rises they initially demand, Wieladek said. But even an increase of roughly 6 per cent to 12 per cent would still be “very large”, he said. The country’s construction industry has been hit by a sharp downturn in the past year, as high interest rates and stagnant economic growth took their toll on building activity. 

Carsten Burckhardt, who is responsible for the construction industry on the IG BAU board, said inflation had surged since the last collective wage bargaining agreement for the sector in 2021, when workers in the west of the country had a pay rise of 6.2 per cent and those in the east an 8.5 per cent rise. Since then, German annual inflation averaged 7.9 per cent in 2022 and 5.9 per cent last year, leaving many building workers worse off in real terms.

“Everyday life has become immensely more expensive in the past two years; increases in food prices, higher rents, higher energy costs and other things have to be dealt with,” he said. “We deliberately demand a fixed amount because it is important to us that employees in the lower wage groups in particular have significantly more money in their wallets.” 

One factor strengthening the union’s position is that the German construction sector is facing significant labour shortages. A survey by the German Chamber of Commerce and Industry (DIHK) in November found that just over half of the country’s construction companies were struggling to fill vacancies.

Burckhardt said: “The shortage of skilled staff and workers is being complained about all over the place; now we can actually do something about it.”

The ECB has identified the risk that eurozone wage growth could continue accelerating, after reaching just over 5 per cent last year, as one of the key factors that could cause it to delay cutting rates.

During meetings at the World Economic Forum, ECB president Christine Lagarde warned the central bank would only have the information it required on wage pressures by “late spring” and that such data would be necessary before making any decision to lower borrowing costs.

Her comments jolted markets, which had fully priced in a cut to the central bank’s record high benchmark interest rate of 4 per cent by April.