For years, real wages fell because of high inflation. This trend has stopped since 2023. Employees will probably only really have more in their wallets this year – but will that lead to more consumption?
Inflation compensation bonus and a higher minimum wage caused the purchasing power of Germans to increase slightly last year for the first time since 2019. However, the increase in purchasing power was only minimal. Real wages grew by an average of 0.1 percent compared to 2022, as the Federal Statistical Office (Destatis) announced today.
According to this, wages rose by 6.0 percent, the fastest they have been since 2008. But in real terms there was hardly anything left because consumer prices rose almost as strongly, at 5.9 percent.
Significant plus expected in the current year
Inflation has a major impact on people’s purchasing power. This connection is measured using real wages – i.e. nominal wages minus inflation. The real wage determines the earnings that employees actually have, taking price changes into account.
According to Destatis, real wages have fallen every year since 2020. In 2020, the increased use of short-time work due to the Corona crisis contributed to falling real wages, while in 2021 and 2022 high inflation ate up the nominal wage increase. Real wages have now started a slight recovery. Purchasing power had already increased again in the second quarter of 2023 for the first time in two years. In the current year, the chances are good that employees will have noticeably more in their wallets.
The Kiel Institute for the World Economy (IfW), for example, expects a nominal wage increase of 5.6 percent for 2024. With a presumed inflation rate of between two and three percent, this would result in a real increase of around three percent. “We should see the strongest increase in real wages this year since 2015,” predicted ING chief economist Carsten Brzeski. “With an inflation rate of around three percent and nominal wage growth of four to five percent, good times are ahead for employees.”
Purchasing power at the level of 2016
The increasing purchasing power is good news for the German economy, which is in acute danger of recession. However, ING expert Brzeski does not expect a consumption boom: “This will hardly help consumption, as fear of saving will probably increase again.” Because of the economic downturn, consumers are holding on to their money and putting more money aside than they have in almost 16 years, as the GfK market researchers and the Nuremberg Institute for Market Decisions (NIM) found in their survey.
Other experts also do not believe that the expected increases will be enough to offset the losses in purchasing power from recent years and to stabilize consumer spending. “Within two years, the gains from half a decade have been lost,” said the head of the tariff archive at the Economic and Social Sciences Institute (WSI) of the Hans Böckler Foundation, Thorsten Schulten, in a recent interview tagesschau.de. At the end of 2023, the purchasing power of employees was on average six percentage points lower than in 2020 and at the same level as in 2016.
In order to catch up, at least a real wage increase of six percent is necessary, says Schulten. That is not realistic within a year. “If our predicted real wage increase of three percent occurs, we would at least have reached the level of 2019 again – i.e. before the Corona and energy crisis,” says Dominik Groll, head of labor market analysis at the IfW. But that is only good news at first glance. “Even then, we would still be around five percent below the level we would probably be at without the crises.”
“Trade continues crisis course”
The experts’ assessment is confirmed by retailers’ surprisingly weak start to the year: their sales fell by 0.4 percent in January, adjusted for inflation (in real terms), compared to the previous month. Economists surveyed by the Reuters news agency had expected growth of 0.5 percent.
“The retail sector is continuing its crisis course,” commented the chief economist at Hauck Aufhäuser Lamp Privatbank AG, Alexander Krüger, on the development. “For sales to turn around, consumers would first have to shake off their bad mood.”
Meanwhile, the inflation compensation premium also contributed to the positive development of real wages. This tax- and duty-free payment of up to 3,000 euros per employee is a voluntary benefit from employers. The increase in the minimum wage to 12 euros per hour in October 2022 also had a positive effect. This meant that last year, the fifth of full-time employees with the lowest earnings received the largest wage increase: employment income rose by 11.4 percent.
With information from Till Bücker, ARD financial editorial team.