German wage hikes: A small step in the right direction

The Wall Street Journal reports this morning that German workers are receiving bigger wage increases. This is good news, and not just for German workers. As I discussed in a recent post, Germany’s trade surplus—the largest in the world, relative to GDP—is a drag on European and global growth. In a world that is short of aggregate demand, Germany’s trade surplus redirects spending away from other countries, reducing output and incomes abroad. Higher wages in Germany should promote spending by German households on both domestic goods and imports, reducing the imbalance.

Allowing wages to rise is not a concession by Germany but rather part of what the country signed on to when it joined the euro zone. Germany has been insistent that the so-called peripheral countries increase their competitiveness through slower wages rises or even wage cuts. Wage increases in Germany are an equally important, and symmetrical, part of this necessary adjustment process. Moreover, this adjustment involves no German sacrifices. German firms, which will be slightly less cost-competitive, may export less but they will also see greater demand at home. German workers are unambiguously better off, receiving higher wages commensurate with their higher productivity.

The wage increases are steps in the right direction, but relatively small steps. More gains for German workers in the future would be both warranted and a win-win proposition for Germany and its trade partners.

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