Concerted Action - Preventing the Wage-Price Spiral? Short Cut Highlights

Inflation in Germany is at record levels and warnings of an impending wage-price spiral are growing louder. Now Chancellor Olaf Scholz has announced that he will bring employers and unions together in a “Concerted Action” to discuss a course of action to tackle inflation. The Grand Coalition took a similar approach at the end of the 1960s to find a way out of the economic crisis at the time – with mixed success. Does an alliance between financial and wage policy promise more success this time? Can the current burdens be reduced in this way without Germany sliding into recession? And: what role does monetary policy play in the coordination process?

We discussed this in our New Economy Short Cut “Concerted Action – Preventing the Wage-Price Spiral?” with IW Director Michael Hüther and Anke Hassel (co-director of the Jacques Delors Centre at the Hertie School).

The idea of a “concerted action” to beat inflation

Michael Hüther introduced the discussion round with a historical classification of the concept of “concerted action”. The original idea for this was raised in the mid-1960s by the then Council of Economic Experts and taken up by the Minister of Economics, Karl Schiller, partly out of concern about a wage explosion. Joint coordination with a group of 20-30 participants from government, the Bundesbank, trade unions and business associations was supposed to lead to wage, monetary and fiscal policy working together towards the utilisation of production potential. In view of the major macroeconomic challenges and the four upcoming transformations (digitalisation, demographic change, decarbonisation, deglobalisation), he believes that such an initiative could be helpful in averting stagflation.

Anke Hassel then explained that the failure of the “concerted action” at the time was due to its lack of balance: the trade unions’ wage restraint had not been reciprocated by comparable concessions from other actors. This was another reason why the negotiation format could not work a short time later, during the oil price shocks in the early 1970s, when it was urgently needed. Later attempts at coordination in Germany, such as the “Alliance for Jobs”, were also not very successful overall. Similar formats in some European countries were nevertheless beneficial for the respective accession process to the European Union.

Key takeaways

In Hassel’s view, “concerted action” is not necessary in view of existing formats of the Federal Chancellery such as the “Alliance for Transformation”, especially as this carries the potential risk of limiting the trade unions’ scope for an offensive collective bargaining policy. Further initiatives that promote a closer exchange between the BMF and economists and company representatives would be welcome in principle. Hüther, on the other hand, promoted the idea of better macroeconomic coordination. In his opinion, it should not be about questioning the autonomy of collective bargaining. One-off payments or betterment vouchers were good instruments to support households that were currently suffering particularly from inflation. Both academics agreed that there were currently no signs of a wage-price spiral. They also advocated a deeper stocktaking of the causes of inflation, to which economic research institutes can contribute in any case.