(CNN Business) – Nearly 2 million workers in Europe’s largest economy are poised for a big pay rise.
Three German political parties they agreed to form a new government on Wednesday, and left-wing Social Democrat Olaf Scholz will replace Angela Merkel as chancellor after lengthy coalition negotiations.
As part of the coalition agreement, the country plans to increase its minimum wage to 12 euros (US $ 13.46) an hour, from the current rate of 9.60 euros (US $ 10.77) an hour.
The move could increase the income of almost 2 million people in Germany who earn minimum wage, or about 5% of workers, according to Carsten Brzeski, an economist at ING. He said the move was “clearly significant.”
The minimum wage was already scheduled to rise to 10.45 euros (US $ 11.72) in July 2022. The coalition agreement text it does not indicate when the largest single increase will 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 broader wage pressures.”
Germany’s aggressive central bank took the unusual step of publicly criticizing the move this week, calling it “worrisome.” He said it would have a knock-on effect on the wages of those who earn the most.
Economists and policy makers around the world have been closely watching rising wages as a key component of inflation. In Germany, inflation in October stood at 4.5%, the highest in almost three decades, as energy prices soared and the cost of food soared.
Germany first introduced a national minimum wage of € 8.50 (US $ 9.54) in 2015.
Support for minimum wages in Europe has grown as the power of unions has waned. The European Commission says there was a drop in the proportion of EU workers covered by collective agreements between 2000 and 2015, with drops particularly sharp in Central and Eastern Europe.
A new EU bill announced earlier this month seeks to bolster minimum wages across the bloc with new requirements.
“During the previous crisis, lowering minimum wages and dismantling sectoral collective bargaining was the harsh medicine prescribed for many member states,” EU Member of Parliament Agnes Jongerius, who sponsored the measure, said in a statement. “Now, we are fighting to increase legal minimum wages and strengthen collective bargaining in Europe.”
Germany’s minimum wage is already among the highest in the European Union.