Market forces do not negotiate: an empty labor market threatens to fight inflation

Market forces don’t negotiate
An empty labor market threatens to fight inflation

By Max Borowski

“United Action” aims to persuade employees to cut wages. Faced with an enormous staff shortage, they can be the employers of all people who fuel inflation in their peril. There are already signs of such development in the first sectors.

Workers, employers, the federal government, as well as the Bundesbank and “wise businessmen” are looking for “united action” ways to compensate for the hardships caused by the enormous rise in prices without further heating up inflation. “Pay moderation” is the keyword here. Workers represented by trade unions should be satisfied with relatively modest increases in income and receive other benefits, eg through tax credits. But even if everyone present in this group, who first met at the Chancellery on Monday, would agree, it is doubtful whether this will even be reflected in reality. Because the actors currently deciding about wage development are not represented at all in the talks and will not be negotiated with: the forces of supply and demand in the labor market.

The job market is empty like never before. According to the latest data from the Labor Market Research Institute, companies in Germany were looking for 1.7 million employees in the first quarter. It has long been a shortage not only of highly qualified specialists, but also of employees in all sectors and fields. As a result, companies are often willing to pay high salary increases to attract or retain employees for important positions.

This situation on the labor market is fundamentally different from the situation at the end of the 1990s, when, for example, collective agreements, through the Law Firm, created the then “Alliance for Labor”. Against the backdrop of mass unemployment at the time, trade unions should practice wage restraint in return for providing jobs. Today, however, hardly any employee has to worry about his job – quite the opposite.

Historical example as a warning

This puts the unions in a strong negotiating position but also under pressure. In some sectors, we can already see that the wages they negotiate are lagging behind overall wage increases, says labor market expert Hagen Lesch. “This development, technically referred to as wage drift, is now mainly occurring in areas of the service sector where unions are rather under-represented,” says an economist at the German Institute for Economics (IW). “In an industry where unions have traditionally held a strong position, this has yet to be seen.”

Wage drift can turn “concerted action” into a waste. If employers, with staff shortages, ignore the moderate wage increases agreed in collective agreements and pass the extra costs on to consumer prices, it could set off a terrible wage-price spiral and trigger inflation in the long run.

Moreover, such a development could seriously harm the trade unions and the collective agreement set up in Germany. The historical model for the current office round, “Akcja Koncernowana” from 1967, should be a warning. At that time, trade unions, referring to social responsibility in the fight against inflation, agreed to wage agreements with a significant loss of purchasing power. In view of the good economic situation, many employees in most companies were not satisfied with it. Wild strikes broke out in many industries and trade unions were forced to change course after fierce internal conflicts.

The new “united action” may still make some contribution to the fight against inflation, says economist Lesch. For this purpose, however, it should not follow the historical model and refrain from a formal agreement between the parties to the collective labor agreement. Instead, the federal government could offer benefits, such as tax-free bonuses, not only to workers covered by collective agreements, but to all workers. This could ease inflation expectations, and thus the upward pressure on wages. However, whether this is enough to prevent a wage-price spiral will largely depend on the balance of power in the labor market.

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