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Labour costs IW-Nachricht 5. November 2015

Nothing new in the West

In 2014, Western Germany once again was ranked among the industrial locations with the world’s highest labour costs. Only in a handful of smaller countries – Norway, Switzerland, Belgium, Denmark and Sweden – did companies in the manufacturing industry have to shoulder even higher costs.

Labour costs are made up of many components. Besides an employee’s gross pay and salary – known as the direct pay – the next-largest position is the employer’s social security contributions. The employer’s pension scheme and other costs – including training and development expenses, severance pay, workplace restaurant allowances and family subsidies – also represent significant costs. Adding all of these amounts together reveals the following (see chart):

With labour costs of 39.97 euros per hour, Western Germany was the world’s sixth most expensive industrial location in 2014.

The industrial sector operated at much lower costs in the English-speaking countries – with a work hour costing employers the equivalent of 27 euros in the USA, and 26 euros in the UK. Eastern Germany fell into this same category at 25 euros per hour.

With rates between 11 and 23 euros per hour, labour costs in the southern European crisis-plagued countries remained far below the levels in Germany and English-speaking countries in 2014.

There are very few countries where additional labour costs – i.e. everything paid for actual work performed, beyond the set salary – are higher than in Germany. In Western Germany’s manufacturing industry, 76 euros of additional labour costs apply for every 100 euros of direct pay. In Belgium, the additional costs amount to 100 per cent – the equivalent of a second salary; in Austria, the extra costs amount to 92 per cent of the direct pay, and in Italy, the figure is 89 per cent.

These peak figures are attributable to the social contributions that largely have to be shouldered by the employer in these three countries; whereas in Germany, the burden of these contributions is shared between the employer and employee.

In Denmark’s industrial sector, the additional costs amount to only 38 per cent, since social security is largely financed by taxes.

To counter a straight comparison of industrial labour costs, it is frequently argued that, by way of intermediate goods, the labour costs of service providers have an influence on the price of a product. If their labour costs – like in Germany – are relatively inexpensive in comparison to the industrial sector, the location performs better than what is communicated based purely on the manufacturing industry’s cost ranking.

However, even when viewed from this perspective, 72 per cent of Germany’s product-related labour costs are of the country’s own making. This means, even if the wages for intermediate goods manufacturers are included in a mixed calculation, this has little influence on the country’s international labour cost ranking. This places Germany at seventh place.

This year, the German labour cost position will be impacted by two factors:

1. Salaries. During the first half of 2015, the gross monthly earnings in the manufacturing industry increased by a good 3 per cent compared to the same period of the previous year. This results in a considerable power gain for employees, assuming consumer prices remain constant. Since the social security contributions are hardly changing in 2015, the labour costs will increase at approximately the same pace. Hence, Germany will once again have considerably higher cost dynamics to overcome than the average in the euro area, where labour costs in the first half of 2015 increased by just under 2 per cent.

2. Exchange rates. The development will be less expensive compared to countries outside the euro area (see chart). After all, the euro has considerably declined in value during the year 2015. In the first nine months, the British pound was listed at 11 per cent higher than the annual average for 2014, the Swiss franc at 14 per cent higher, and the US dollar at a substantial 19 per cent higher. This development led to a clear improvement of the German labour cost position compared to these countries.

Through the appreciation of the Swiss franc this year, Switzerland will assume the top position in the labour cost rankings, superseding Norway. However, the improvements in competition for the German economy that result from changes in the exchange rates are not permanent and could quickly revert in the opposite direction.

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