Germany’s federal states agreed with trade unions on Friday a 4.35 percent wage increase for more than 2 million civil servants and other public sector employees over the next two years, a result that fell well short of their initial demand.
The wage agreement, one of the biggest in this year’s round of pay negotiations, is expected to boost consumer spending at a time when vibrant domestic demand has replaced exports as the main growth driver in Europe’s largest economy.
The unions said pay would rise by 2 percent this year, starting retroactively on Jan. 1, and 2.35 percent from January 2018. The increase comes on top of a two-stage increase of 4.75 percent agreed for public sector workers for 2016/17.
“We have reached a deal with significant real wage increases,” said Frank Bsirske, head of Germany’s biggest white collar union Verdi.
He said the agreement would bring substantial improvements, especially for civil servants and public sector employees working in education and other social sectors.
“Overall, this is a positive result,” Bsirske said.
Verdi had initially demanded a yearly pay hike of 6 percent, arguing that at a time of rising state revenues this would help keep growth in private consumption on track as a tick-up in inflation slowly eats into Germans’ spending power.
The German economy grew by 1.9 percent in 2016, the strongest rate in half a decade, helped by soaring private consumption, increased state spending on refugees and higher investment in construction.
Economists expect domestic demand to drive overall growth this year, due to Germany’s growing population, record-high employment, increased job security and ultra-low borrowing costs.
Overall wage growth has slowed, however, suggesting Germany’s consumption-led upswing could have reached its peak.
Pay rose by 2.3 percent on average last year after 2.7 percent in 2014 and 2015 each, data from the Federal Statistics Office showed.
Inflation is also picking up, mainly due to rising energy costs, meaning German consumers have less money to spend. Real wages, which take the development of consumer prices into account, rose by 1.8 percent in 2016 after 2.4 percent in 2015.
The Bundesbank expects German inflation to pick up to 1.5 percent in 2017 and 1.7 percent in 2018, not far from the European Central Bank’s target of just under 2 percent.

Source: Arab News