German labour market remains solid

German labour market remains solid as a rock, defying the winter weather and the euro crisis. German unemployment increased by a non-seasonally adjusted 18,400 in February, bringing the number of unemployed to 3.156 million. Despite the harsh winter weather, the February increase was somewhat smaller than in previous years. In seasonally-adjusted terms, unemployment even dropped, keeping the seasonally-adjusted unemployment rate at last month’s 6.9%.

For the labour market, the tailwind stemming from a favourable business cycle has ebbed away. It seems as if the German labour market has reached its natural rate of unemployment last year. A further additional drop in unemployment would require additional structural reforms, eg a further reduction of the mismatch between vacancies and job-seekers’ qualifications, or substantially higher growth. As none of these two factors are likely to gather pace this year, the German labour market should continue treading water in the period ahead. Nevertheless, at the current juncture and in its current shape, even a stagnating labour market will be growth supportive.

The overall trend of the German labour market still masks interesting diverging trends across the sectors. While unemployment has increased in the export-oriented manufacturing sector, companies operating in domestic sectors, as eg in the construction sector and health services, still have a strong demand for labour. This trend is also reflected in the latest European Commission survey, which showed that recruitment plans remain cautious in the manufacturing sector but very favourable in the service sector. This new divergence could have an impact on the new round of wage negotiations. Several unions already announced their bids for this year’s negotiations and more will follow. Demands range between 3.5% and 6%. Obviously, these demands are unlikely to be fully met but with our expected inflation rate of 2% for this year, real wages look set to increase for the second year in a row.

The German job miracle has become less magic. However, even without magic and enchantment, the labour market should remain growth-supportive.