Inflation Trepidation

Global markets went on a wild ride last week initially fuelled by fears on Monday that average American hourly earnings had increased by 2.9% year-to-date. The next day clamour over labour cost-driven inflation spread to the Eurozone. Heralded as the best pay deal in 12 years, IG Metall, Germany’s largest trade union, secured a 4.3% wage increase for its 900,000 members employed in engineering industries across Baden-Württemberg, home to Airbus, Daimler, Porsche and Bosch. Signalling an end to German wage compression, in which trade unions have exercised pay restraint in return for job security since the 2008 financial crisis, Thursday brought further news that Verdi, Germany’s public sector union, was calling for a 6% wage rise in forthcoming negotiations with state and local governments. The spillage of German inflationary pressure into neighbouring countries is expected next and anticipated to be a much needed stimulus to consumption in Eurozone economies but with the global price competitiveness of national exporters hanging in the balance.  


Is this the Future of Work?

After more than a decade of wage constraint, it was not surprising that the present buoyancy of German manufactured exports should have released pent up demand for higher wages. But what was more unexpected was IG Metall’s tying of a pay rise to the right of employees to reduce their working time from 35 to 28 hours per week over 2 years. Driving this to the forefront of the bargaining agenda has been a growing demand amongst union members for the striking of a better balance between working schedules and caring responsibilities for children and elderly relatives. The provision, grudgingly accepted by Südwestmetall – Baden-Württemberg’s engineering industry employer association, runs counter to European trends. According to Eurostat, the EU’s statistical agency, the average number of hours worked per week by manufacturing employees in 2016 was 37.3 in France, 37.7 in Germany and 39.6 in the UK. So this recent effort to rebalance time between workplace and home-life could provide an indication of how employee expectations may be shifting even in traditional sectors such as engineering and manufacturing.


Why might Employee Expectations be Changing?

The 28-hour week option agreed between IG Metall and Südwestmetall has suggested that Germany’s post-war ‘male breadwinner’ model of household income, traditionally supported by the earnings of a male household head employed in industry, is now firmly a vestige of the past even in the country’s industrial heartland. It has been well documented that employment amongst German women has risen since the 1970s. But demand for a 28-hour week was also possible confirmation of the growing presence of women working in engineering and the increasing responsibilities assumed by their male counterparts at home. Additionally a 28-hour week suggested that solutions for dealing with costly family challenges such as child care and long-term care for elderly relatives, once the sole preserve of private life, might be having unforeseen consequences for labour costs and skill gaps.                  




Can German Employers Afford a 28-Hour Work Week?

The strength of IG Metall’s bargaining position came as much from the boom in German manufacturing orders as from the tightening domestic supply of engineers and technicians. The deal’s trade off for Südwestmetall employers was trumpeted as being the ability of firms to introduce 40 hour contracts when production spikes and skilled staff are scarce. But this belies a bigger structural problem in the German labour market. Employers’ sharpening hunger for skilled and tech-savvy employees has been pushing against the reality of Germany’s rapidly aging population with an increasing shortage of younger workers. This demographic crisis is occurring at a time when business models are being reconceived by new technology investments supported by next generation skill-sets. As a result, German industry’s need for engineering talent is growing not diminishing as Fourth Industrial Revolution technological change, in the form of artificial intelligence, software engineering and robotics, is ramping up. The pressing question for German engineering employers is whether it is possible to concoct the right cocktail of technological innovation and workforce management supportive of the productivity necessary to absorb higher labour costs stemming from skill shortages exacerbated by working hour reductions.


What are the Business and HR Implications?

IG Metall’s winning of a 28-hour week option speaks volumes about the business challenges ahead. Inflationary labour costs will become more acute as the skills needed to innovate and enable new business models become scarce or are inflexibly deployed. Demand for a 28-hour week can be mitigated by workplace childcare facilities. But it also brings into focus the heretofore uncalculated business costs of long-term care for the elderly, something previously outside the scope of workplace bargaining. Large German engineering firms are searching abroad for fresh sources of talent and greater labour law flexibility as shown in unprecedented overseas operational expansion. But the deeper question is how the economic and social pillars of Modell Deutschland and the small and medium-sized enterprises of the Mittelstand adapt to meet these mounting demographic challenges if Germany is to maintain its position as one of the world’s leading engineering hubs.