Overall wage growth?

One likely explanation for the still rather modest pay demands (in the context of
the current macro backdrop) of 6% – besides the above-discussed issues of the
28h option in metal or the 13th month salary in construction – is that many
companies are already paying above the collectively agreed wage level to retain
qualified workers.

Aside from strong anecdotal evidence, this can been seen in
the increasing wage drift (the gap between collective wage increases and the
wages and salaries that employees are actually receiving). In Q3 2017 the gap
stood at 0.8 pp. Based on the wage increases for 2018 in contracts already
agreed last year, and assuming that in the service sector (with lower productivity
growth) settlements will probably end up more modest than in the booming
metal industry, the overall increase in collective wages will probably remain
slightly below 3% in 2018.

By contrast, effective wages (wages and salaries per
employee), which determine companies’ cost basis as well as consumers’
income levels, could increase by around 4%. Given that Germany accounts for
29.1% of EMU GDP (and that wages are gradually rising in the rest of EMU too)
this supports our view that EMU core inflation will gradually increase and allow
the ECB to exit QE by the end of the year, despite Bundesbank research
showing that the pass-through of higher wages to prices is less than 50% in
Germany.