Why More Than 100,000 Employees Of Germany's Volkswagen AG Are Getting A Pay Hike This Year

More than 100,000 German employees of Volkswagen AG (Otcmkts:VLKAY), mostly factory workers, are getting a pay raise as local politicians seek to curry favor with trade unions ahead of federal elections later this year.

VW reached a pay deal to lift wages 3.4 percent from September, then by another 2.2 percent from July 2014. The pay hikes come a week after IG Metall, Germany’s 3.7 million strong engineering and metal workers union, negotiated a similar deal, Reuters reported Monday.

Though the wage hikes are meant to gain union support ahead of the vote, Berlin hopes the salary increase will boost spending on goods and services. Private consumption was the main driver of growth in the first quarter in Germany.

But Germany’s export competitiveness may take a hit as labor costs rise, leaving it vulnerable to other cheap manufacturers in the debt-stricken euro zone.

VW urged its staff to accept a “moderate” pay hike as the global recession dragged down sales and profits.

"We're pushing the envelope of what's feasible, given the difficult market situation in Europe and tough international competition," Horst Neumann, head of human resources at VW, said in a statement on the pay deal, which will apply to 97,000 workers at its six western German plants and 5,000 employees at the financial services division, Reuters reported.

Volkswagen sales were slightly down last month after reaching a 40-year high in March.