Start of “concerted action”: What helps against a wage-price spiral

In the “concerted action” the government wants to work with employers, trade unions and researchers to find ways to stop the threatening wage-price spiral. Which instruments are being discussed – and how do economists judge the proposals?

What worked at least temporarily to support the economy in the late 1960s should now help again: a concerted action by politicians, trade unions and employers. In 1967, the then Economics Minister Karl Schiller (SPD) sat down with employee and employer representatives to exchange views on how to proceed in view of the first decline in economic output since the founding of the Federal Republic. In line with the Stability Act passed in 1967, the aim was to reconcile growth, employment and price stability. Specifically, coordinated steps should bring the economic turnaround – among other things, through moderate wage increases that are justifiable for the economy as a whole.

55 years later, such a closing of ranks should succeed again. Chancellor Olaf Scholz (SPD) is bringing the parties to the bargaining agreement, scientists and the Bundesbank together around one table for the first time today – in particular to limit a further increase in inflation and cushion the consequences of the high inflation rate. “If the heating bill suddenly increases by a few hundred euros, then that’s a sum that many people can’t really cope with. It’s socially explosive,” said the Chancellor yesterday in the ARD summer interview. Scholz made it clear that concrete results cannot be expected at the start of the talks today. He is aiming for a longer-term process.

Unions want significantly higher wages

An important question is what the next wage settlements will look like in large sectors – for example in the metal and electronics industry or in the chemical industry. Collective bargaining agreements with strong wage increases can, on the one hand, at least partially compensate for the high inflation and thus at least limit the real wage losses of the employees. This strengthens purchasing power and benefits consumption. At the same time, however, high collective bargaining agreements harbor the risk of a wage-price spiral, i.e. the mutual build-up of wage increases and inflation.

In the run-up to the concerted action, it was reported that Scholz had suggested a tax-free one-off payment as a possible instrument. The trade unions reacted sceptically. “One-off payments don’t get us anywhere,” said Ver.di boss Frank Werneke. “Permanently rising prices must be fully offset by permanent wage increases.” And the new head of the German Trade Union Confederation (DGB), Yasmin Fahimi, also rejects tariff restraint. “In the long term, only higher wages and targeted support for people without work can be useful instruments to counteract higher living costs,” she emphasized.

Immediately before the start of the concerted action, Scholz declared that the original reports about his push for a one-off payment were fictitious. “Of course we thought about how we could support union activities, especially when prices go up next year,” he said. “But no one is suggesting that that’s why there should be no real wage increases.”

Employees do not want to be fobbed off with one-off payments and relief packages. The IG Metall insists on their wage demands. She is demanding seven to eight percent higher wages for the next wage round. The metallers feel encouraged by the wage settlements in other industries. For example, the steelworkers negotiated a 6.5 percent increase in salary.

Politicians and the European Central Bank (ECB) are alarmed. They fear “second-round effects”. A recipe is frantically sought for how such a dangerous spiral can be slowed down. The only thing that is clear so far is that there is no silver bullet. Economists disagree. They consider a number of instruments to be conceivable. While some are calling for price caps, others are calling for fiscal policy measures.

Debate on one-off payments

One-off payments are particularly controversial among economists. The employer-oriented Institute of the German Economy (IW) supports the Scholz proposal. IW director Michael Hüther considers one-off payments to be a “proven instrument” in the current wage negotiations. Carsten Brzeski, chief economist at ING Germany, also finds the one-off payments “a good idea, as they could partially compensate for the loss of purchasing power, control future wage costs and should also reduce the risk of job losses”. The President of the German Institute for Economic Research (DIW), Marcel Fratzscher, rejects one-off payments.

The former economist Volker Wieland, Professor of Monetary Economics at the University of Frankfurt, is also critical of one-off payments. “There is no reason why the state should now provide an additional transfer that can benefit workers without burdening employers.” The state had already interfered with the minimum wage this year and ensured an increase of over 22 percent. “This is more than inflation compensation.”

The first unions have already opted for a one-off payment. In February, the IG BCE trade union agreed with the chemical employers that the 580,000 chemical workers would each receive a flat-rate payment of 1,400 euros. However, this should only bridge a phase of a few months until the further development of prices and the longer-term consequences of the Ukraine war become clearer. The parties to the collective bargaining agreement therefore want to meet again in October to negotiate linear wage increases again.

Call for a new relief package

Other economists think new relief packages make more sense. The economist Achim Truger is committed to this. He said recently that the relief that has already been granted to citizens has taken the pressure off wage negotiations. “Further relief measures could increase this effect.” Professor Volker Wieland from the University of Frankfurt doubts that. “Measures such as the tank discount and the 9-euro ticket seem to slow down inflation, because the goods and services in question are cheaper,” he explains tagesschau.de. But in doing so, the state supports aggregate demand, more spending can be made, and that then drives inflation further. “It’s just a left-pocket-right-pocket game. The state takes on additional debt that the taxpayer will later pay for.”

Do price controls help?

Another antidote to inflation and the wage-price spiral could be price controls. Some politicians and economists recommend a gas price cap. The American economist Kenneth Rogoff considers this instrument unsuitable. “Price controls can be politically useful, they can work for a short while.” But they cause severe distortions and ultimately make the situation worse, according to his research.

Jörg Kramer, chief economist at Commerzbank, is skeptical about such relief. If an important production factor such as energy becomes massively more expensive, the overall economic supply of goods will decrease at a given price level. “If the state boosts demand in this situation with broad-based so-called relief packages financed by credit, more demand meets the shrunken supply, and inflation rises. You can’t relieve the population across the board, that’s only possible with a view to low-income households.”

It is more important to start at another point, the supply of goods, say some economists. Because this is where there is currently a bottleneck. There is a particular shortage of energy. Procurement of additional energy sources should alleviate inflation. Federal Economics Minister Robert Habeck is currently trying to compensate for the loss of Russian gas supplies by purchasing liquefied natural gas (LNG).

higher taxes

Fiscal policy measures are an alternative. But they’re pretty unpopular at the moment. Several economists advocate tax increases. They would discourage citizens from spending more money. “Fiscal policy can contribute to relaxation if it cushions social hardship,” says KfW chief economist Friti Köhler-Geib.

And what role can the ECB play in combating a wage-price spiral? It should credibly convey to the public that it is taking action against high inflation, says Kerstin Bernoth, deputy head of the Macroeconomics department at the DIW. “If people expect wages to fall, they don’t urgently need higher wages.” So the threatening spiral would not materialise.

The important role of the ECB

Most economists are calling for the European monetary authorities to reduce inflationary pressure by significantly raising interest rates. Even if the economy then slides into recession, it will be manageable. With quick and strong interest rate hikes – at the price of a recession – the ECB could nip the wage-price spiral in the bud, says ING economist Brzeski. “Because then workers will focus on job security instead of higher wages.”

Thomas Mayer, director of the Flossbach von Storch Research Institute, believes that the inflation dynamic can only be stopped by raising interest rates and an economic slowdown. “It takes a recession to beat inflation,” he says. However, the ECB is afraid of interest rate hikes due to the high level of debt in some European countries.