The logo of German carmaker Volkswagen is seen on a rim cap in a showroom of a Volkswagen car dealer in Brussels
The logo of German carmaker Volkswagen is seen on a rim cap in a showroom of a Volkswagen car dealer in Brussels, Belgium July 9, 2020. Reuters

Volkswagen on Wednesday agreed a two-year wage deal for workers at its western German factories, offering around 8.5% more pay, which was below inflation but above what other employers have yielded in recent weeks.

The deal, affecting around 125,000 of the carmaker's employees, would have been considered exceptionally generous until recently but is now below inflation, which was 11.6% last month in Germany, Europe's largest economy.

Workers will receive a 5.2% wage hike from June 2023 and another 3.3% from May 2024, as well as a lump-sum payment worth 3,000 euros ($3,093) after tax to help offset soaring inflation.

Unions across Germany and Europe are demanding higher pay to give workers relief from record inflation, but employers are resisting, citing rising material and energy costs.

In Italy, unions representing workers at automakers including Stellantis and Iveco requested an 8.4% pay rise, which the companies described as "heavy".

Daimler Truck said earlier this month unions were asking for an 8% increase but that others in the industry were offering 6-6.5%, and that it would offer somewhere in between.

Holger Schmieding, chief economist at Berenberg Bank, saw the Volkswagen deal as "overall a bit high" but saw no risk of a "wage price spiral - it's more of a hump," he said.

The deal agreed by the carmaker and metalworking union IG Metall is similar to an agreement struck last week for the wider metal engineering industry, which set the benchmark for 3.9 million metal and electrical sector workers nationwide.

"In combination with political relief measures such as the electricity and gas price brakes as well as further one-off payments from the state, the result is an overall package that curbs the impact of inflation," IG Metall negotiator Thorsten Groeger said in a statement.

IG Metall, which is Germany's largest trade union, had initially demanded an 8% wage increase over 12 months for the workers at six German VW plants as well as at subsidiaries including Financial Services.

($1 = 0.9697 euros)