No-Drama European Migration Helps Keep German Wages in Check

(Bloomberg) -- On a Friday morning in Frankfurt’s Kosmidis delicatessen -- surrounded by ceiling-high stacks of cheese, olives, and artisanal cakes -- the staff are chatting in Romanian, Polish and Italian.

It’s a phenomenon replicated in cafes, kindergartens and medical practices around the city after more than 1.6 million migrants from the European Union flocked to Germany since 2011. The influx is more than three times as large as the number of refugees taken in permanently over the same period -- and it’s a key reason why the economy, with record-low unemployment and interest rates, isn’t overheating.

No-Drama European Migration Helps Keep German Wages in Check

After more than 330,000 EU citizens moved to Germany in 2015, another 225,000 arrived by November 2016, according to the latest Federal Statistics Office data seen by Bloomberg.

“Workers move to the countries where the labor market is doing better, and Germany’s has been doing quite well since the start of the crisis,” said Guntram Wolff, director of the Bruegel think tank in Brussels. “The numbers suggest that a still somewhat slow wage growth in Germany can at least in part be attributed to immigration.”

Public discontent over immigration, especially asylum seekers from war-torn countries such as Syria, helped propel the populist Alternative for Germany party to parliament for the first time in September’s elections. The hit to the traditional parties means Chancellor Angela Merkel is still struggling to form a government.

Yet without the large-scale arrival of workers from the rest of Europe, Germany could be facing steep price gains that more than offset bigger wage hikes.

No-Drama European Migration Helps Keep German Wages in Check

Companies had 1.1 million unfilled vacancies in the third quarter, a 19 percent increase over the previous year, and unemployment fell to a record-low 3.6 percent. The economy is growing at its fastest pace in six years, yet workers’ pay has failed significantly to accelerate -- negotiated wages rose only 2.3 percent in 2017, barely faster than the previous year -- and inflation is below 2 percent.

Those statistics are double-edged. While they show financial-stability risks are contained in Germany, they also echo the European Central Bank’s struggle to revive euro-area wages and prices. As long as German costs stay muted, the ECB has little reason to believe the rest of the currency bloc is strong enough to be weaned off of monetary stimulus.

No-Drama European Migration Helps Keep German Wages in Check

The data also suggest that the freedom of movement guaranteed by the EU have reduced the natural level of unemployment, or the point at which inflation suddenly takes off.

What Our Economists Say...

“Germany’s economic success in recent years has depended a lot on big gains in employment. That would not have been possible without the arrival of migrants – especially those from elsewhere in the EU. With monetary policy loose and global demand strong, a steady flow of new workers will be needed next year if overheating is to be avoided. Bloomberg Economics expects the economy to run a little hot in years to come, but it will still take time for this to thicken pay packets.”

-- Jamie Murray, Bloomberg Economics

For more, see our Germany Insight 

Immigrants from member states such as Romania or Croatia don’t need special permits to work in Germany or any other EU nation. While the linguistic and cultural gaps can be large, some have also worked in other Western European countries, easing their integration and helping to reduce the social tensions which accompanied the arrival of refugees in 2015.

With the U.K.’s departure from the EU set to drive European workers back to the continent by the hundreds of thousands, the trend is set to continue -- even if some national migration eases as eastern Europe’s economies expand.

Immigration “has helped resolve labor shortages by increasing supply rather than increasing wage rates,” Alain Durre, an economist at Goldman Sachs, wrote in a client note “And large, cheap labor reserves still exist in Central and Eastern Europe.”

©2017 Bloomberg L.P.