An International Comparison of Unit Labour Costs: The Cost Competitiveness of German Industry in Times of Considerable Uncertainty

Between 1999 and 2024, unit labour costs in German manufacturing rose by a total of 20 percent, exactly matching the average for all comparator countries but considerably less than the 32- percent increase in the rest of the eurozone. Looking back, the relative unit labour cost position of German industry has been subject to a number of different developments. While there was a dramatic deterioration in the 1990s, by 2007 significant ground had been regained. As the country recovered from the global financial crisis of the following two years, unit labour costs again rose at an above-average rate. The manufacturing recession of 2019, the disruption of supply chains, particularly for products dependent on semiconductors, the slump in demand and production during the COVID19 pandemic, and the price shock, especially in the energy sector, caused by Russia's war of aggression in Ukraine have caused an 18-percent rise in unit labour costs in German industry since 2018. While other countries experienced a similar rise in unit labour costs of around a fifth during this period, what differed in Germany was that real value added simultaneously declined. Structural problems, such as the particularly pronounced change in Germany’s demographics, business uncertainties, fears of significantly higher social security contributions and China's technological catch-up, combined with disruptive developments in some areas, such as the automotive industry's move away from combustion engines, have also played a significant role. This has contributed to an apparent worsening of the country’s position in international markets and meant that the high level of German labour and unit labour costs is now having an even more adverse impact. It is therefore essential that measures be taken, on the one hand, to restrain social security costs so as to keep labour cost growth moderate and, on the other, to enhance the country’s capacity for innovation.