Economix: Have German Wages Really Risen?

Matthias Rumpf of the Organization for Economic Cooperation and Development wrote me the following response to my column on the Germany economy:

I really liked your piece. It gives a very nice comparison on the two countries. However, for someone who followed the German debate over the past years from a “domestic” perspective I found it surprising that you made a point on the higher wage increases in Germany.

For most observers in Germany, wage moderation that took place over the past 10 years (and which was endorsed by the trade unions) was one of the key factors behind the increase in competitiveness and the higher growth rates you are seeing now.

That’s a very good point. For space reasons, I did not delineate between two different time periods in the column, and it’s worth doing so here.

From roughly 1985 to 1995, German workers enjoyed considerably larger real hourly wage increases than American workers. From 1995 through the present, wages in the two countries have grown at a similar pace – growing initially and then slowing down, to a pace more recently not much faster than inflation. (These trends are visible in the second chart in a recent blog post.)

Why did German wages grow faster in the first period? Some statistical quirks involving the reunification of the country played a role. But inequality also played an important role. In the United States, much of the benefit of economic growth went to a small slice of the population at the top of the income distribution. In Germany, the gains were more broadly shared.

And do the similar wage gains in the second period mean that workers in both countries have done equally well? No, German workers have still done better, because German job growth has been stronger.

So the typical worker who remained employed in Germany from the mid-1990s through today has received a pay increase comparable to that of the typical worker who has remained employed in the United States. But the odds of an American worker’s being unemployed have risen substantially over the last 15 years. The odds of a German worker’s being unemployed have fallen.

Bottom line: In Germany, the wage moderation of the last decade that Mr. Rumpf mentions has helped increase overall employment. In the United States, there has been no such silver lining. Wage growth for most workers and employment growth have both been muted.

Article source: http://feeds.nytimes.com/click.phdo?i=95e483ab02153af60d2cb801b7c2b9dc