REAL WAGES IN GERMANY: New evidence of considerable flexibility in response to changing economic conditions

Contrary to conventional wisdom, the real wages of workers in Germany are responsive to the business cycle, according to research by Heiko Stüber, which is published in the March 2017 issue of the Economic Journal. His finding that real wages are not totally rigid holds not just for newly hired workers but also for all workers.

It is sometimes argued that wages in Germany should be rigid because of the country”s formal labour market institutions, in particular, sectoral bargaining agreements. But by analysing longitudinal, matched employer-employee data, the new study demonstrates that real wages in Germany are not rigid. The author takes account of concerns that not controlling for cyclical job upgrading and downgrading leads to biased results.

The result that wages are not totally rigid despite Germany”s formal labour market institutions is attributable to at least two factors:

• First, opening clauses in collective contracts allow firms in Germany to deviate from sectoral agreements to secure jobs.

• Second, nearly 50% of firms that recognise a union pay wages above union wages. These so-called ”wage cushions” can easily be reduced if the economic situation worsens.

The results of the new study strengthen the dismissal of theories based on cyclically rigid hiring wages made by economics Nobel laureate Chris Pissarides. The results also challenge the assumption of wage rigidity in search-and-matching models to generate realistic unemployment volatilities.

Given that employment relationships in Germany are often long-term relationships, a firm”s decision to open a vacancy and to make a hiring offer, as well as a worker”s decision to accept an offer, should depend not only on the hiring wage but also on expected future wage developments and/or promotion prospects.

This suggests the need for further research on the evolution of wages (and productivity) and the influence of changing labour market conditions – for example, decreasing coverage of collective bargaining; the increasing share of workers with fixed-term contracts; and skill-biased technological change.

”The Real Wage Cyclicality of Newly Hired and Incumbent Workers in Germany” by Heiko Stüber is published in the March 2017 issue of the Economic Journal. Heiko Stüber is at the Institute for Employment Research in Nuremberg, Germany.

Heiko Stüber

heiko.stueber@iab.de or heiko.stueber@fau.de