Labour costs are rising in Germany – good for consumption, but bad for competitiveness

The statutory minimum wage, that has been in force for one and a half years, is to be raised for the first time in early 2017. The so-called minimum wage commission proposes an increase from currently EUR 8.50 to EUR 8.84 per hour. This corresponds to a four percent rise compared with the gain in average wages and salaries in Germany since December 2014 of 3.2 percent.

The commission has thus proposed a slightly disproporationate increase but has not heeded some of the demands made in recent weeks to „take a bigger slice of the cake“ and raise the minimum wage to a round figure of EUR 10. And rightly so, because a disproportionately high increase would have significantly heightened the pressure at the lower end of the wage scale once again.

Given the still insufficient time for reliable empirical analyses since the introduction of the minimum wage, we still do not have any conclusive findings on the impact of the minimum wage on employment and unemployment. After all, the minimum wage was introduced during a phase of brisk economic activity and favourable labour market conditions, making it „easier to absorb“. Yet a very marked increase could still have negative repercussions for the labour market, especially in regions where the general income level is relatively low.

Politics in general should take account of the cost burden on the economy. Especially in times of greater uncertainty, for example the future export possibilities, companies should not find themselves overburdened on the cost side. While the more productive companies can also cope with a greater increase in costs for a period of time, weaker suppliers can just as quickly experience difficulties. After all, labour costs in Germany have been spiralling upwards more quickly in the last five years than the EU average, thereby generally diminishing our competitiveness in relation to our European neighbours.

The high burden of taxes and social insurance contributions in Germany is adding to this. According to the calculations of German employer federations, contribution payers currently already transfer 39.8 percent of their income to the pension, health and unemployment insurance as well as the nursing insurance scheme. And there is still more to come: the contribution burden can be expected to rise to 40.2 percent at the beginning of 2017 due to a higher contribution rate to the nursing insurance scheme and higher additional contributions to health insurance.

Even now, Germany is one of the countries with the highest contribution burden on employee earnings by international comparison. According to OECD calculations, a German single-person household has to pay nearly 50 percent of its earnings to the public sector in the form of taxes and social insurance contributions. Measured against the average of the 34 OECD countries, this overall tax ratio lies at only some 35 percent, with only employees in Belgium and Austria having to bear an even greater burden than in Germany. For married couples with children, the German ratio is visibly lower at 34 percent, but here too, it still way exceeds the OECD average of nearly 27 percent.

Politics should keep a close watch on the forthcoming burdens on the social system and resist the temptation to use the current benign phase to enhance social security benefits. From around the year 2020 the number of wage earners in Germany will decline strongly for pure demographic reasons, while the number of pensioners will rise noticeably. As no surpluses are being set aside in our pay-as-you-go social system, the higher pension payments and probably rising health costs will have to be financed in full by what will then be fewer contribution payers.

Demographically, the years between 2020 and 2035 will probably be the most difficult since this is when the baby boomer generation enters retirement. Preventive measures must be undertaken now, for example in the form of extending working lifetime and proactively managing social spending. Unfortunately things can be seen heading in the opposite direction in Germany at the moment. For me a source of concern!

 

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