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Why this country wants to give 2 million workers a 25% pay rise

Germany plans to boost its minimum wage. (Sources: Getty)
Germany plans to boost its minimum wage. (Sources: Getty)

Germany plans to increase its minimum wage by 25 per cent, taking it to €12 (AU$18.77), with nearly 10 million people to receive a wage boost.

It comes after the Social Democratic Party, the Greens and the Free Democratic Party agreed to the historic deal, despite the country’s central bank describing the move as “worrying”

Around 2 million workers are on the minimum wage in Germany, while around 8 million others with wages tied to the minimum wage would also see the increase. 

Politically, increasing the minimum wage is a popular move, although AMP Capital chief economist Shane Oliver is unconvinced the maneuvre will ultimately boost Germany’s economy.

“Economically, it’s one of those things that can go in circles,” Oliver told Yahoo Finance.

“On the one hand, you need a minimum wage to protect lower income earners and ensure a liveable standard of living for them.

“By the same token, there’s the concern that it prices them out of the market.”

Germany’s new minimum wage rate comes amid a growing international focus on inflation and wage rises.

Globally, workers’ wages are stuck in a tug of war against rising inflation, with the US recording a 30-year-high increase in the cost of living.

In Germany, inflation is at 4.6 per cent - the highest rate since the Berlin Wall was destroyed. And it’s expected to surpass 5 per cent by Christmas, raising the spectre of 1920s and 1940s-style hyperinflation.

Locally, the story is a little different.

Australian inflation rose 3 per cent in the year to September. And on 17 November, the Australian Bureau of Statistics (ABS) reported a wage price index increase of 0.6 per cent over the September quarter, taking annual growth to 2.2 per cent.

The Reserve Bank of Australia wants wages growth between 3-4 per cent and inflation between 2-3 per cent before it deems the economy strong enough to accommodate a rate rise.

The linchpin for these to occur is for unemployment - and critically, underemployment - to drop.

“For many years, [Australia has] had higher levels of underemployment and you want to see higher levels of full employment,” Oliver said.

“It gets you to the point where wages growth starts to naturally rise, without government mandates for minimum wage increases.”

In order for this to happen, Oliver believes Australia should be more closely watching the underutilisation figure, which is the summation of underemployment and unemployment.

Or, as the ABS describes, a measure of the number of potential hours of labour that remain untapped.

That’s currently at 14.7 per cent, and reflects a group of workers who are technically employed, but are far from working at full capacity.

Unemployment increased to 5.2 per cent in October, while underemployment climbed to 9.5 per cent.

Without adequately addressing the underutilisation rate, achieving broad-based wage growth is difficult.

“You need a much smaller pool of unemployed, or underemployed, workers, so that when a worker shows up for a job, there’s competition and they can demand a higher wage,” Oliver said.

He added that while there was evidence of wage growth occurring in Australia, there was still a way to go.

“It will take a lot of time for the tightness in the labour market to flow through to higher wages.”

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