Wage increases moderate despite economic boom

The Danish economy is continuing to grow to such an extent that economists now fear that the economy will overheat. One of the most important elements to be affected in such a scenario is wages. In August 2006, tense discussions took place between economists and representatives of trade unions and employer organisations concerning their respective wage demands prior to the collective bargaining rounds, due to take place in the spring of 2007.

Economic context

Economists believe that the country’s economic growth, combined with a widespread shortage of labour and low wage increases in the last few years, will inevitably put pressure on wage levels and subsequently result in price increases. They argue that this could result in a wage–price spiral which could, in turn, jeopardise the competitiveness of the economy.

The current economic situation in Denmark indicates that all the conditions for a wage–price spiral are present, while unemployment is simultaneously at a record low. The most recent figures from Statistics Denmark, in June 2006, reveal that the current rate of unemployment stands at 4.5% (or 3.9% according to the EU definition), corresponding to 123,100 unemployed people. This figure is clearly below the estimated level of structural unemployment (i.e. the estimated unemployment rate when there is full employment) which stands at 150,000. At the same time, labour supply problems exist in many occupational fields, while wage increases in the private sector have been moderate compared with last year, at only 2.9% during the first quarter of 2006 and 3.3% during the second quarter of the year. In 2005, the average annual increase in wages was 2.9%. In addition, interest rates are low, real estate prices are booming and exports are increasing. This reflects a very high purchasing power; furthermore, the liberal/conservative government has introduced a tax freeze. All of these factors indicate that intense bargaining rounds can be expected during the renewal of the private sector collective agreements in the spring of 2007. Trade unions and employer organisations have started to lay down their respective wage demands for discussion in the autumn of 2006.

The country’s economic situation has led to major public debate around the question of whether or not the scenario forecast by economists will occur. Opinions differ among economists, trade unionists and employers on this matter, although the debate continues to focus on wage issues.

Economists warn against wage pressure

Economists, particularly those employed in the financial sector, are calling for greater moderation and restraint on the part of employees in relation to the upcoming wage bargaining. They argue that the wage increase of 3.3% in the second quarter of this year is too high compared with other countries, yet they forecast a larger wage increase of 4.5%; this would add to the risk of the Danish economy overheating and could thus jeopardise the current economic boom. They also argue that if employees fail to act responsibly and to accept moderate wage increases, the competitiveness of Danish enterprises will fall. This may result in a decline in sales and increased offshoring of activities to lower labour-cost countries and could thus pose a serious threat to the internal economy and current employment levels.

Economists from employer organisations largely share this view. In the spring of 2006, they warned enterprises against accepting wage increases that are too high in relation to local-level wage bargaining, despite the favourable economic trends. This led to accusations from the Central Organisation for Industrial Employees (CO-industri) against the Confederation of Danish Industries (Dansk Industri, DI) of undue interference in the local negotiations through which actual wage levels are determined (DK0603019I). The central-level agreements lay down a framework for minimum wage increases, but this is often an indication of the expected rate of wage increases. The trade unions have generally insisted that wage increases have not been alarmingly high in recent years.

Further wage increases expected

Meanwhile, the social partners have committed themselves to keeping a balanced rate of wage increases in relation to Denmark’s most important trading partners in the European Union. The tripartite Statistical Committee (Statistikudvalget) – composed of civil servants and representatives of the Danish Confederation of Trade Unions (Landsorganisationen i Danmark, LO) and the Confederation of Danish Employers (Dansk Arbejdsgiverforening, DA) – monitors annual increases in real wages and inflation. In their September 2005 report, the committee concluded that a moderate increase in real wages can be expected during the next few years.

The presidency of the Economic Council foresees wage increases over the next few years of up to 5%, which will increase purchasing power and may lead to a higher inflation rate. They refer to a similar situation which occurred in the 1980s, when there was low unemployment, labour shortages and wage pressure resulting in overspending and a harsh period for the Danish economy in subsequent years. The main focus of their warning, however, is the tax freeze. They have strongly advised the government to introduce a financial policy emergency plan if wage increases reach 5%, for the purpose of reducing the purchasing power of consumers.

Trade union reaction

Views on wage restraint

The trade unions’ reactions, in particular to the warnings of the financial sector economists, have involved a mixture of indignation and strong criticism. Unions believe that the call for wage restraint is exclusively targeted at employees; at the same time, managing directors and top-level executives in some cases have received major bonuses in the form of share options and similar schemes as a reward for increasing earnings. This has resulted in an appeal for fairness among top-level executives by the Minister for Employment, Claus Hjort Frederiksen of the Liberal Party (Venstre). Like the trade unions, he believes that these executives should share the responsibility for ensuring a sound and stable Danish economy. The minister considers that providing extremely high salaries to managing directors and high-level executives gives out the wrong signal to the wider economy.

Continued moderate wage increases

Unlike financial sector economists, the trade union economists see no immediate risk of a wage pressure leading to a wage–price spiral. The figures, published by DA, concern wage developments during the second quarter of 2006 and show moderate wage increases, with variations among different occupations and categories of employees.

For instance, wages in the manufacturing and services sectors increased slightly more in the second quarter of 2006 than in the first quarter. According to the trade unions, this is due to the fact that pay rates increased slightly during the local wage bargaining process in the spring and that there has been an extraordinarily high proportion of overtime hours worked, which had to be remunerated. The economists in LO and in the Economic Council of the Labour Movement (Arbejderbevægelsens Erhvervsråd, AErådet) thus stress that, although the labour market is under pressure, the new figures do not indicate that a wage drift is imminent.

The employers also point to overtime work due to labour shortages as a major cause of the 3.3% wage increase during the second quarter of 2006. Thus, both DI and the Danish Mechanical and Electrical Contractors’ Association (Tekniq) do not consider the current wages development as alarming. ‘The wage increases we are seeing right now are to a high extent caused by overtime work. So there is no reason to fear runaway wage increases. Our main concern will be the shortage of labour in the coming years’, stated DI Director, Richard B. Larsen. Therefore, higher wages may become a competition parameter in the search for employees with the right qualifications, making it difficult to control such individual wage increases.

In all sectors covered by DA agreements, wages increased by 3.3% from the second quarter of 2005 to the second quarter of 2006. During the first quarter of 2006, wages increased by 2.9% on the corresponding 2005 figure, signifying that wages in the DA fields have increased by 0.4 percentage points.

Commentary

The actual rate of wage increases, which most economists and trade union and employer representatives – with the exception of economists in the financial sector – consider to be balanced, seems to fall in line with expectations. Production has grown, exports have increased and, according to the Ministry of Finance, enterprises and employers (69%) have benefited more than employees (31%) from the economic boom. The labour shortages is bound to continue during the next agreement period. The United Federation of Danish Workers (Fagligt Fælles Forbund, 3F) and the Danish Metal Workers’ Union (Dansk Metal) believe that there are limits to the wage restraint of employees, taking into account the increased growth and profits made by companies.

It is impossible to draw any definitive conclusion of future trends due to economic globalisation. If the competitiveness of Danish enterprises is weakened because of rising costs, this may lead to outsourcing and relocation of activities and subsequent job losses. At the same time, the development shows that the Danish economy is open and more integrated in the European economy. This not only requires enterprises to be competitive in the Single European Market and also in the global market; it also shows that, with a fixed exchange rate policy in relation to the euro, Denmark is actually a ‘shadow member’ of the euro zone and consequently also bound by its objectives, one of which is to curb inflation. Therefore, although the Danish economy is currently doing well, recent analysis reveals that all economic key actors in Denmark, including employers and trade unions, depend on Europe’s development and expansion. Thus, there is no reason to foresee demands for extravagant wage increases.

Carsten Jørgensen, FAOS

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