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On Wednesday, three German political parties agreed to form a new government, with leftist Social Democrat Olaf Scholz to succeed Angela Merkel as chancellor. after long coalition negotiations.

As part of the coalition agreement, the country plans to increase its minimum wage to € 12 ($ 13.46) an hour, from € 9.60 ($ 10.77) an hour currently.

The move could boost the incomes of nearly 2 million people in Germany who earn minimum wages, or around 5% of workers, according to Carsten Brzeski, an economist at ING. He said the decision was “clearly important”.

The minimum wage was already set to rise to € 10.45 ($ 11.72) in July 2022. The text of the coalition agreement did not indicate when the larger one-time increase would take effect.

UBS economist Felix Huefner said the move should “boost overall wage growth” in the German economy, while warning that it could “contribute to wider wage pressures.”

Germany’s hawkish central bank took the unusual step of publicly criticizing the measure this week, calling it “disturbing.” He said this would have a ripple effect on the salaries of top earners.

Inflationary pressure

Economists and policymakers around the world are closely monitoring rising wages as a key component of inflation. In Germany, inflation in October stood at 4.5%, the highest measure in nearly three decades, as energy and food prices soared.

Germany first introduced a national minimum wage of € 8.50 ($ 9.54) in 2015.

Support for the minimum wage in Europe grew as the power of unions declined. The European Commission indicates that there was a decline in the proportion of European workers covered by collective agreements between 2000 and 2015, with particularly sharp declines observed in Central and Eastern Europe.

A new EU bill announced earlier this month aims to tighten minimum wages across the bloc with new requirements.

“During the previous crisis, lowering minimum wages and dismantling sectoral collective bargaining was the harsh remedy prescribed for many member states,” MEP Agnes Jongerius, who sponsored the measure, said in a statement. “Now we are fighting to increase legal minimum wages and to strengthen collective bargaining in Europe.”

The German minimum wage is already one of the highest in the European Union.

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