Debating the Damage of High Labor Costs for German Business

There was a time when some people used to think of Germany as something akin to a land of milk and honey -- perhaps the European version of the United States: where dreams can come true and much money can be made.

If the Cologne Institute for Economic Research (IW) has anything to say about it, one of its economists will tell you that labor costs for German workers are a turnoff to foreign investors.

According to a recently released study by IW economist Christoph Schröder, manufacturing companies in western Germany, where wages are still higher than in the former communist eastern part of the country, paid 27.87 euros ($35.84) an hour for their workers in 2005.

Study says US personnel costs are lower

Compare that to the United States and Japan, where employees in the manufacturing sector cost 19.27 euros and 18.60 euros per hour respectively, according to the IW study. It also reported that other nations competing with Germany, such as Italy, Great Britain and France, pay labor costs of between 18 and 21 euros.

"That puts western Germany at a disadvantage when it comes to foreign investors considering this area," Schröder said.

Western Germany is only better off than Norway (29.45 euros an hour) and Denmark (28.33 euros), Schröder's study said.

Labor costs consist of wages and personnel costs (or social benefits and taxes) that employers must pay. Schröder's study reported that western German manufacturing employers pay nearly double in personnel costs of what US manufacturing employers pay.

Schröder said even eastern German manufacturing businesses are at an advantage over western ones since the former pay only 17.37 euros in hourly labor costs for an employee. The east therefore draws the business, he concluded.

Reading between the lines

But other experts cautioned that such studies have to be studied carefully.

"You have to read the fine print," said Rainer Jung, the spokesman for the Macroeconomic Policy Institute (IMK) in Düsseldorf.

Jung's institute, the IMK, released a study in June that showed that labor costs for Germany as a whole stood at 26.20 euros an hour in 2004 -- making them mid-level compared to 15 other European Union countries.

The IMK study shows that hourly labor costs in Germany are lower than those in most northern and western European countries, including Denmark, Sweden, Belgium, Luxemburg, France, the Netherlands and Finland.

It is countries like Hungary and the Czech Republic where labor costs in general are much lower than Germany's. Employers in Poland paid average hourly labor costs of 4.70 euros in 2004 in the manufacturing and service sectors.

Absurd claims?

Furthermore, the IMK study didn't only look at the manufacturing industry, Jung said.

"We also took the private service sector into account -- which includes everyone from a business consultant to a waitress," he said.

Jung added that labor costs in the manufacturing industry are generally higher than in the service sector, so figures are bound to differ.

In the end, said Gustav Horn, IMK's Scientific Director in a statement, "our figures show that the notion that Germany has a hard time competing on the global or its own market because of high labor costs is absurd."

Excellence as competitive advantage

Germany's labor costs are on par with those of its trading partners and competitors, Horn said, adding that one must also look at a country's productivity.

"Germany is a leader in exports," Jung said. "That would not be possible if labor costs were too high here."

The IW's Schröder begged to differ.

"High labor costs do indeed put a country or business region under pressure," he said. "Many companies manufacture elsewhere. German businesses must try to balance it out by offering top-quality products and high-precision technology tailored to the needs of their customers."