This year, German workers are set to enjoy the largest increase in real wages in over a decade, with a nominal rise of 5.5% in 2024, translating to a real increase of 3.2% after inflation. In contrast, French wages rose only 1.4%. The disparity is attributed to Germany’s severe inflation crisis and economic vulnerabilities. However, both nations are witnessing stabilization in inflation rates, allowing employees to regain purchasing power, with significant wage growth driven by government initiatives in Germany.
This year marks a significant celebration for German employees, according to a recent report from the Hans-Böckler Foundation, closely associated with the Confederation of German Trade Unions. Real wages are projected to experience their most substantial increase in over a decade, with wages influenced by collective agreements rising by 5.5% nominally in 2024. When adjusting for inflation, this equates to a real increase of 3.2%. In stark contrast, French wages appear considerably less impressive, having increased by only 1.4% in 2024, following a decline of 3% from the end of 2020 to the end of 2023, which is only half the growth experienced by their German counterparts. This raises the question: what accounts for this disparity? Furthermore, what implications does this have for savings and purchasing power?
The Impact of Inflation on Wages
One crucial observation is that Germany faced a more severe inflation crisis compared to France. With its economy heavily reliant on industrial sectors and Russian gas, Germany was particularly vulnerable to the fallout from the war in Ukraine and the disruptions caused by the Covid pandemic. Consequently, inflation soared to levels not witnessed since the country’s reunification, peaking at 6.9% in 2022 and 5.9% in 2023. In comparison, France’s inflation rates stood at 5.9% and 5.7% during the same years. Additionally, President Emmanuel Macron’s proactive economic policies and price controls have shielded the French populace from some of the harshest effects. According to the Hans-Böckler Foundation, German employees experienced a significant drop in purchasing power, losing about 5.7% from 2021 to 2023, while French workers faced a smaller decrease of only 1.2% to 2% during that same timeframe.
A Shift Towards Economic Stability
However, there’s no need for alarm; the contrasting trajectories of real wages in France and Germany primarily reflect a gradual recovery to economic norms. The sharper decline in Germany has led to a more pronounced wage increase. Currently, inflation appears to be stabilizing in both nations, with rates at 1.7% in France and 2.2% in Germany as of November 2024. These figures are significantly lower than the planned wage increases, ensuring that employees in both countries will see an enhancement in their purchasing power in 2024. Remarkably, this recovery in purchasing power is expected to reach levels comparable to those prior to the Covid pandemic. Both the Hans-Böckler Foundation and Insee predict that by the end of the year, French and German employees will have regained about half of the purchasing power lost between late 2020 and late 2023.
In Germany, the wage surge is also attributed to an extensive initiative led by Chancellor Olaf Scholz, aimed at boosting domestic demand. The rationale is straightforward: higher wages lead to increased consumer spending, which in turn stimulates demand. Given the challenges German exports face from China and the forecasted decline in GDP, the chancellor is strategically focusing on the domestic market for economic revitalization. In 2023 and 2024, new collective agreements have been established for over 20 million German workers, and inflation compensation bonuses have been negotiated across almost all major industrial sectors. Depending on the industry, these bonuses can range from several hundred to 3,000 euros, and they are exempt from taxation. Additionally, the minimum wage was raised to 12 euros gross per hour at the end of 2022, sending a strong signal to German consumers about the government’s commitment to enhancing their economic wellbeing.