Nearly 2 million workers in Europe’s largest economy will receive a significant pay rise after three parties agreed on Wednesday to form a new government, and left-wing Social Democrat Olaf Scholz will succeed Angela Merkel as mayor. Chancellor, writes CNN.

As part of the coalition agreement, the country intends to increase the minimum wage to 12 euros per hour from 9.60 euros per hour at present.

The measure could increase the incomes of almost 2 million people in Germany who receive the 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 set to rise to 10.45 euros in July 2022. The text of the coalition agreement did not specify when the increase will take effect.

UBS economist Felix Huefner said the measure should “stimulate overall wage growth” across the German economy, while warning that it could “contribute to broader wage pressures,” writes

Germany’s central bank has publicly criticized the move this week, calling it “worrying.” The institution said it would have a knock-on effect on wages for higher-income people.

Economists and policymakers around the world have been closely monitoring wage growth as a key component of inflation. In Germany, inflation in October was 4.5%, the highest measure in almost three decades, as energy prices have skyrocketed and food costs have risen.

Germany introduced for the first time a national minimum wage of 8.50 euros in 2015.

Support for the minimum wage in Europe has increased as trade union power has declined. The European Commission says that between 2000 and 2015, there has been a decline in the proportion of EU workers on collective bargaining, with particularly sharp declines in Central and Eastern Europe.

A new EU bill, announced earlier this month, seeks to strengthen minimum wages across the bloc.

The minimum wage in Germany is already among the highest in the European Union.

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