With a slight time lag, the strong surge in inflation in Germany from mid-2021 also had an impact on nominal wages. First, growth in actual earnings picked up, followed later by growth in negotiated wages. In light of the considerable losses in employees’ purchasing power, combined with strong demand for labour and very high profits amongst enterprises, trade unions demanded significant nominal increases in wages. They were also able to achieve their demands to a greater degree than usual. In many cases, one-off payments were granted as inflation compensation bonuses. Permanent wage increases became more prevalent later on. Compared with some other euro area countries, wages in Germany responded more slowly, but the wage pressures there are proving to be more persistent.

In Germany, the real wage losses incurred by employees as a result of the surge in inflation have now been largely recouped. This process has made particular progress among service providers. The gap remains wider in the goods-producing sector. Despite the losses in real wages being almost fully offset, trade unions in services sectors have barely lowered their demands. With the option of granting inflation compensation bonuses set to expire, increases in negotiated wages are shifting to the permanent wage components. The fairly high degree of labour market tightness is playing a role here. Although the rate of labour market utilisation is generally in decline, it has so far been above average in Germany, for example.

A faster stabilisation of wage dynamics in Germany, due to signs of weakness in the labour market, is being countered by the strong increases in wages that are anticipated in upcoming collective bargaining agreements. In the near future, wage increases are likely to be greater than in the euro area as a whole. These findings do not fundamentally call the expected disinflation process in Germany into question. However, alongside productivity developments and profit margins amongst enterprises, the labour market situation has a significant impact on the pace and degree of disinflation.

During the upswing in the German economy before the coronavirus pandemic, wage growth in Germany was moderate. Following catch-up effects in the first few years after the economic and financial crisis of 2008-09, growth in actual earnings was lower than would have been expected given the high demand for labour. Strong labour market-oriented immigration counteracted greater wage growth. 1 Relatively subdued productivity growth and low rates of inflation did not provide any particular stimulus for wage settlements. Overall, taking labour productivity developments into account, wage growth in the 2010s was broadly in line with the 2% monetary policy definition of price stability for the euro area. 2 During the acute phase of the pandemic in 2020, there was a greater loss in earnings, especially as a result of sharp reductions in working hours as well as widespread short-time work amongst employees. As pandemic-related restrictions were lifted, working hours were increased again and actual earnings per employee rose significantly.

The surge in inflation from mid-2021 soon had an impact on labour markets and wages, too. Supply-side shortages linked to high aggregate demand triggered a surge in inflation from around the middle of 2021. This was considerably exacerbated in 2022 by the increases in the prices of energy and food surrounding Russia’s invasion of Ukraine. Amid high demand for labour and pronounced losses in purchasing power, there was increased growth in wages. The surge in inflation has since eased significantly. The high growth in wages, however, continues.

With regard to the further process of disinflation, the question arises as to how to interpret the still persistently high wage growth in Germany. 3 A comparison with developments in other euro area countries since the start of the most recent period of inflation helps to contextualise wage developments in Germany. In addition, alongside looking at Germany from a macroeconomic perspective, a sectoral analysis provides further insights. One key question concerns the extent to which wage growth was able to offset losses in purchasing power caused by the surge in inflation. Consideration must also be given to labour market tightness.

Wages in Germany rose very sharply during the period of inflation and have continued to see strong growth in 2024 so far, too. At 6.4% in 2023, actual earnings 4 recorded their highest rate of growth since 1991. Wage growth was robust again in the first half of 2024, diminishing only slightly on the 2023 rate. Negotiated wages 5 also grew substantially from January to August 2024, rising by an average of 6.2% on the year. 6 Actual earnings responded more quickly to changes in the economic environment, while negotiated wages align with a time lag, due in part to their long agreement periods, which often span two years. With inflation rates in decline, wage drift 7 and, to a certain extent, actual wage growth have also decreased in 2024 so far. 8 However, this does not necessarily mean that growth in actual earnings will fall rapidly. This is because the recent strong rises in negotiated wages, which account for much of the growth in actual earnings, are, in some cases, still a reflection of the most recent period of inflation.

Looking at the entire period since the beginning of the most recent period of inflation, wage growth in Germany was not exceptionally strong compared with the rest of the euro area. Since the third quarter of 2021 – i.e. since the beginning of the most recent period of inflation – growth in actual earnings in Germany has been around average for the euro area. 9 In the other major euro area countries, such as Italy and France, growth was somewhat lower than in the euro area as a whole, whilst in Spain and the Netherlands, it was somewhat higher. In smaller Member States, however, there were significantly larger deviations from the euro area average.

The pattern of wage growth over time differed between the Member States of the euro area. In some countries, such as France and Italy, wages were rising while the surge in inflation was already under way. Later on, wage growth in these countries was lower. In other countries, including Germany and the Netherlands, wages did not rise as sharply at first, but did catch up. The different patterns of wage growth over time can be partly explained by country-specific assistance measures taken to stabilise labour markets during the coronavirus pandemic and its aftershocks. 10 The transition from short-time work to full-time employment as the pandemic subsided was accompanied by an increase in average wages, as employers paid full employee compensation again after the short-time working arrangements had ended. This purely automatic increase in wages occurred mainly in countries with high proportions of short-time workers, such as France and Italy. A similar effect occurred with the temporary reductions in non-wage labour costs (such as social security contributions in Spain), which caused employee compensation to rise once these measures ended.

Overall throughout the period of inflation, wage growth in the Member States was closely linked to price developments. Wages tended to rise more sharply in countries where consumer prices also rose more sharply. Although their inflation processes followed similar trajectories, there were differences between the Member States. The latter can be explained, in part, by differences in the structures of energy markets, dependencies on energy imports, and various government measures to mitigate high energy prices. 11 These measures were intended to restrict or cushion losses in purchasing power, partly with the aim of slowing the spillover to wages. Hence, assistance with energy prices dampened wage growth, while the expiry of pandemic-related measures amplified it. During this period, both effects occurred at different points in time in the Member States and contributed to the heterogeneity of wage developments across the euro area. 12 As a result, wages in some countries have now caught up with the higher prices again (e.g. Spain, Greece, Austria and Belgium), whilst other countries have even seen real wage growth (e.g. Portugal, Slovenia and Croatia). By contrast, in major countries such as Germany, France, Italy and the Netherlands, as well as in the euro area as a whole, real wages have not yet fully recouped their losses. 13 From this perspective, further catch-up effects would be expected there.

Unit labour costs, however, saw stronger than average growth in Germany during this period. When evaluating wage developments for enterprises, account must also be taken of growth in productivity. This was weak in many Member States, allowing high wage growth to influence unit costs with little restraint. With regard to the major euro area countries, the ratios of wage growth to productivity growth in Germany and, to a greater degree, the Netherlands were even less favourable than on average across the Member States; as a result, these countries saw above average increases in unit labour costs. This is likely to have weighed on the price and cost competitiveness of German and Dutch enterprises.

Current collective wage agreements in Germany include large wage increases for the rest of 2024. Based on the collective wage agreements that have been concluded thus far, negotiated wages in Germany will prospectively rise by around 9% in the third quarter. They also rose significantly at the beginning of the year. In the second quarter, however, Germany experienced a temporary damper. 14 This was because one-off tax-free and social contribution-exempt inflation compensation bonuses had been paid out in the previous year. 15 Furthermore, wage increases were delayed in some sectors. Both of these factors contributed to significantly dampening growth in negotiated wages for a time in the spring of 2024. Despite a weaker development in the second quarter, growth in negotiated wages will, given the current agreements, not lose momentum this year and will amount to around 6% in the first three quarters of 2024, subject to fluctuations. 16 In the fourth quarter, too, growth in negotiated wages is likely to exceed its historical average.

The latest new collective wage agreements in Germany since June 2024 also provide for large increases in wages. This continues the series of upside surprises in wages. 17 Especially in sectors in which new collective wage agreements were not concluded until long after the start of the period of high inflation (e.g. retail and wholesale trade, printing industry, private banking), the efforts of trade unions primarily focused on compensating for losses in real wages. Unsurprisingly, in these sectors, inflation compensation bonuses were agreed alongside permanent wage increases. In sectors that had already concluded collective wage agreements fairly early in the most recent period of high inflation (e.g. the chemicals industry), only permanent wage increases were agreed when those deals later came up for renewal. These increases were large in some cases. Wages pressures have thus been palpable in collective wage agreements until recently.

Inflation compensation bonuses have played a major role in negotiated wage outcomes since the end of 2022. Knowing where and when which particular inflation compensation bonuses have been paid out, and in what amount, is essential for assessing wage dynamics. This is because, while their impact has been strong, unlike scheduled rates of pay, these one-off bonuses do not provide a baseline for future wage increases, given that they are only available for inclusion in pay deals until the end of 2024. The collective wage agreements currently in force, which can be found in the Bundesbank’s negotiated pay rate statistics, are a reliable source of information on the composition of negotiated wage increases. These data clearly show that inflation compensation bonuses will continue to drive wage dynamics for a number of quarters yet. That said, their contribution to year-on-year wage growth will turn negative in the first half of 2025, when they will have stopped adding to the negotiated wage increases. This effect will significantly dampen the year-on-year growth rates. Once the inflation compensation bonuses have expired, wage growth will be driven more strongly again by the permanent wage components.

Permanent wage increases gained in importance recently. In anticipation of the period following expiry of the inflation compensation bonuses, more social partners have agreed on a significant rise in scheduled rates of pay in recent wage agreements. Where a collective wage agreement has a multi-year term, the first wage increase under that agreement will usually cover a large proportion of the negotiated rise in pay, while the second wage increase, which is mostly scheduled to start around mid-2025, provides a smaller pay hike in some cases. From the middle of 2025, then, wage pressures will be lower than the extremely high year-on-year growth rates for 2024, based on the wage agreements currently scheduled to run through to mid-2025. 18 However, the permanent wage increases baked into the agreements concluded thus far will remain high in the last quarter of 2025, too. At around 4%, the year-on-year growth rate is expected to be well above its average of 2.6% for the years 1991 to 2023.

The losses in real wages suffered by employees in services sectors since mid-2021 have largely been recouped. Looking at the extremely strong nominal wage increases agreed in negotiated wage agreements for some services sectors in the third quarter of this year, cumulated real wage losses in the services sector as a whole since mid-2021 are likely to have been recouped by the end of 2024. In the goods-producing sector, by contrast, the losses incurred since mid-2021 have still not been offset. Wage increases in this sector have been comparatively moderate, given the adverse macroeconomic environment (locational problems combined with weak foreign demand and sluggish global industrial activity). 19

Labour income ratio metrics suggest that employees have suffered some wage share losses since the start of the recent period of inflation. While the labour income ratio in services sectors has been fairly stable since 2021, that in the goods-producing sector has fallen very sharply on balance since around 2021, with some initial signs of recovery only emerging in the first half of 2024.

Trade unions in services sectors have barely lowered their wage demands thus far, even though losses in real wages there have been almost fully recouped. Wage demands in services sectors are still relatively high, ranging from an 8% rise in wages over a 12-month term in the central and local government areas of the public sector 20 to a 19% hike in system catering. 21 Wage demands in the manufacturing sector, too, are higher than their usual, pre-pandemic levels. 22 Current wage demands in the manufacturing sector are therefore likely to still reflect certain efforts to recoup losses in real wages. The most recent wage demands, though, like a 7% per year increase in the metals and electrical industry and the same in the rubber and plastic processing industry, are lower than those in services sectors.

Important wage negotiations in Germany in terms of employee coverage, involving high demands in some cases, are set to take place in the quarters up until autumn 2025. Collective wage agreements covering more than 6 million employees across the manufacturing sector (e.g. metals and electrical industry) and in large services sectors (e.g. public sector employees in central and local government) will expire at or before the end of 2024.

Euro area labour markets emerged from the pandemic in good shape, thanks to government support, but there has been an uptick in tightness. During the pandemic, government assistance helped organisations retain their core staff and avoid widespread layoffs. As a result, unemployment in the euro area rose only slightly higher when the pandemic was at its peak, unlike in the United States, for example. 23 It fell to a record low in the subsequent recovery period following the lifting of lockdown measures. At the same time, job vacancy numbers climbed to record highs on the back of buoyant demand for labour. Only recently did labour market tightness in the euro area ease significantly. The job vacancy rate has been in decline for several quarters now, and unemployment is not falling any further. It is even back on the increase in certain Member States. This cyclical slowdown in labour markets is evident chiefly in Germany and the Netherlands, but also, to a lesser degree, in France. The labour market situation continues to vary widely between countries. Job vacancy rates in Germany and the Netherlands, in particular, are still higher than average, even if they have declined.

In Germany, labour market tightness in the recent period of inflation was mainly reflected in services wages, as the intense labour market tightness in that sector made it easier for trade unions to push for high pay increases in wage negotiations. Trade unions there reached higher than average collective wage agreements with a relatively high percentage of their demands being met. Even in the absence of inflation compensation bonuses, services trade unions are still making high wage demands for sectors where labour market tightness has thus far been higher than average. This is the case, for example, for the upcoming negotiations in the areas of food and beverage service activities, transportation and storage, and for building cleaning companies. The labour market may be cooling, but if labour market tightness does not ease by more, including in services sectors, wage pressures there at least will probably remain high.

Wage growth in Germany could remain somewhat stronger than in the euro area as a whole over the coming quarters. Looking at the past three years as a whole, wage growth in Germany has moved largely in line with that in the euro area as a whole. Recent quarters, however, have seen Germany record stronger than average wage growth, partly owing to catch-up effects, but perhaps also because labour market tightness remains higher than average. In view of the particularly weak productivity trend, unit labour cost growth in Germany might remain above average as well.

While services employees in Germany have already recouped much of the losses in real wages caused by the surge in inflation, trade unions have barely moderated their wage demands thus far. The significant shortage of skilled workers in services sectors seems to be a factor here. In the manufacturing sector, which is facing stiffer economic headwinds, there is still some catching-up to do in terms of offsetting losses in real wages. Taken in isolation, this, too, is likely to push up wages.

The relatively intense labour market tightness of late has led to high permanent wage increases in the latest wage agreements in Germany. This is due in part to the shortage of skilled workers, which, according to surveys by the ifo Institute, remains high in some services sectors. Looking ahead at future pay deals, wage pressures will once again depend more on the labour market situation, which can sometimes vary between sectors. Although these findings do not fundamentally call the expected disinflation process in Germany into question, the pace and degree of that disinflation hinges not just on productivity developments and profit margins, but also on how the labour market in Germany evolves going forward.

Ando, S., R. Balakrishnan, B. Gruss, J.-J. Hallaert, L.-B. F. Jirasavetakul, K. Kirabaeva, N. Klein, A. Lariau, L. Q. Liu, D. Malacrino, H. Qu and A. Solovyeva (2022), European Labor Markets and the COVID-19 Pandemic: Fallout and the Path Ahead, International Monetary Fund, Departmental Paper No 2022/004.

Bossler, M., N. Gürtzgen, A. Kubis, B. Küfner and B. Lochner (2020), The IAB Job Vacancy Survey: design and research potential, in Journal for Labour Market Research, Vol. 54, No 13.

Deutsche Bundesbank (2024a), Forecast for Germany: German economy slowly regaining its footing ‒ outlook up to 2026, Monthly Report, June 2024.

Deutsche Bundesbank (2024b), The German economy, Strong trend growth in wages continues, Monthly Report, August 2024.

Deutsche Bundesbank (2024c), The global disinflation process and its costs, Monthly Report, July 2024.

Deutsche Bundesbank (2023a), Arduous recovery amid high and only gradually easing inflation – outlook for the German economy up to 2025, Monthly Report, June 2023, pp. 1-25.

Deutsche Bundesbank (2023b), Falling inflation, but not yet time to sound the all-clear – outlook for the German economy up to 2026, Monthly Report, December 2023, pp. 15-35.

Deutsche Bundesbank (2019), The impact of wages on prices in Germany: evidence from selected empirical analyses, Monthly Report, September 2019, pp. 15-37.

Deutsche Bundesbank (2018), Wage growth in Germany: assessment and determinants of recent developments, Monthly Report, April 2018, pp. 13-27.

Gόrnicka, L., G. Koester, D. Radowski, E. Gautier, M. I. Peinado, A. Stiglbauer, D. Wittekopf, S. Puente, C. Duarte, F. Martins, G. Basso, R. Lydon, G. Ploj, M. Polemidiotis, H. Pönkä, M. Obstbaum, P. Petroulas, C. Veiga, J. Beka, N. Benatti, B. Fagandini, P. Healy, R. Nizzi, F. Colonna, M. Volkerink, C. Antonopoulos, M. Bing, E. Piryankov, A. L. Gomez Jimenez, Y. Saks, B. Coppens, F. D’Amuri, J. Zajankauskaitė, K. Pribuišis, M. Lindič, M. Doliak, A. Monza, M. Roca I Llevadot, G. Polichetti, G. Gardin (2024), A forward-looking tracker of negotiated wages in the euro area, Occasional Paper Series, No 338, European Central Bank.

International Monetary Fund (2023), France: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for France, Country Report No 23/56, January 2023.

Koester, G., E. Gonçalves, R. Gomez-Salvador, J. Doleschel, M. Andersson, B. González Pardo and L. Lebastard (2022), Inflation developments in the euro area and the United States, ECB Economic Bulletin, Issue 8/2022.

OECD (2020), Job retention schemes during the COVID-19 lockdown and beyond, October 2020.

Sgaravatti, G. (2024), Electricity tariffs dashboard, Bruegel Dataset, May 2024.

Sgaravatti, G., S. Tagliapietra and C. Trasi (2022), National energy policy responses to the energy crisis, Bruegel Dataset, December 2022.

Sgaravatti, G., S. Tagliapietra, C. Trasi and G. Zachmann (2023), National fiscal policy responses to the energy crisis, Bruegel Dataset, June 2023.