IW examines non-wage labour costs in 2003

Funk, Lothar

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IW examines non-wage labour costs in 2003

Published: 31 May 2004

Non-wage labour costs are those categories of companies’ total labour costs that are other than direct compensation - eg employers’ social security contributions for employees and holiday bonuses. Each year, the Cologne Institute for Business Research (Institut der deutschen Wirtschaft Köln, IW [1]) calculates these non-wage labour costs, based on official statistics from the Federal Statistical Office (Statistisches Bundesamt Deutschland, Destatis [2]) as well as from several ancillary statistical sources. Destatis conducts surveys on additional labour costs every four years, and the most recent survey covers developments up to 2000 (due to statistical changes, these data are, however, only partially comparable with earlier years) (DE9803154N [3]). The latest annual report [4] from IW, published in May 2004, extrapolates these official statistics to 2003, based on several additional statistics, such as data from the institutions of the social insurance system and the annual analysis of collective agreements drawn up by the Federal Ministry for Economics and Labour (Bundesministerium für Wirtschaft und Arbeit, BMWA [5]), as well as statistics on absence from work caused by sickness. Moreover, IW analyses official statistics on the numbers of employees and trainees as well as information on employment and companies’ spending on further training and non-wage labour costs by individual associations and companies.[1] http://www.iwkoeln.de/[2] http://www.destatis.de/[3] www.eurofound.europa.eu/ef/observatories/eurwork/articles/non-wage-labour-costs-up-in-1997[4] http://www.iwkoeln.de/data/pdf/content/trends02-04-1.pdf[5] http://www.bmwa.bund.de/

In May 2004, a study by the Cologne Institute for Business Research (IW) found that annual non-wage labour costs in German industry amounted to EUR 21,270 per employee in 2003. The ratio of these costs to direct earnings was 77.1%. In eastern Germany, non-wage labour costs were 40% lower than in western Germany. In the service sector, non-wage labour costs varied considerably by branch, from 65.4% of direct earnings in the retail sector to more than 100% in the insurance and banking sectors. In 2003, non-wage labour costs rose, in particular due to higher social security contributions and an increase in the 'assessable income' ceilings for statutory pension and unemployment insurance.

Non-wage labour costs are those categories of companies’ total labour costs that are other than direct compensation - eg employers’ social security contributions for employees and holiday bonuses. Each year, the Cologne Institute for Business Research (Institut der deutschen Wirtschaft Köln, IW) calculates these non-wage labour costs, based on official statistics from the Federal Statistical Office (Statistisches Bundesamt Deutschland, Destatis) as well as from several ancillary statistical sources. Destatis conducts surveys on additional labour costs every four years, and the most recent survey covers developments up to 2000 (due to statistical changes, these data are, however, only partially comparable with earlier years) (DE9803154N). The latest annual report from IW, published in May 2004, extrapolates these official statistics to 2003, based on several additional statistics, such as data from the institutions of the social insurance system and the annual analysis of collective agreements drawn up by the Federal Ministry for Economics and Labour (Bundesministerium für Wirtschaft und Arbeit, BMWA), as well as statistics on absence from work caused by sickness. Moreover, IW analyses official statistics on the numbers of employees and trainees as well as information on employment and companies’ spending on further training and non-wage labour costs by individual associations and companies.

The official statistics distinguish between direct compensation for hours actually worked and non-wage labour costs. The two categories together amount to total labour costs. Table 1 below provides these data for manufacturing industry in western and eastern Germany in 2000 and 2003.

**Table 1. Labour costs in German manufacturing industry in EUR per employee per year, 2000 and 2003**
.	Western Germany		Eastern Germany
.	2000	2003	2000	2003
Non-wage labour costs	20,459	22,350	12,176	13,480
Direct compensation	26,428	28,580	18,541	20,160
Total labour costs	46,887	50,930	30,717	33,640

Note: Figures refer to companies with at least 10 employees (calculated in terms of full-time equivalent workers).

Source: IW, 2004.

Non-wage labour costs can be divided into payments for 'non-work days' (for example continued payments of wages in case of sickness), special payments (for example additional holiday payments), social security contributions by employers, occupational pension schemes and other non-wage labour costs - see table 2 below.

**Table 2. Non-wage labour costs in manufacturing industry as % of direct compensation**
.	Germany		Western Germany		Eastern Germany
.	2000	2003	2000	2003	2000	2003
Total non-wage labour costs	76.3	77.1	77.4	78.2	65.7	66.9
Payments for non-working days	22.7	22.5	22.9	22.7	21.3	21.1
- Holidays	13.4	13.4	13.5	13.5	12.9	12.9
- Continued payment of wages and salaries in case of sickness	4.0	3.8	4.0	3.8	3.9	3.7
- Paid public holidays	5.3	5.3	5.4	5.4	4.5	4.5
Special payments	13.4	13.1	14.0	13.7	7.4	7.6
- Wealth-creation payments	0.9	0.9	1.0	1.0	0.4	0.6
- Additional holiday payments	3.9	3.9	4.1	4.1	2.1	2.1
- Annual bonuses, wages depending on success etc	8.6	8.3	8.9	8.6	4.9	4.9
Social security contributions by employers	27.5	28.2	27.4	28.1	27.8	28.6
Occupational pension schemes	6.6	7.0	7.1	7.5	2.2	2.6
Other non-wage labour costs	6.1	6.3	6.0	6.2	7.0	7.0

Note: Figures refer to companies with at least 10 employees (calculated in terms of full-time equivalent workers).

Source: IW, 2004.

Differences between western and eastern Germany

In 2003, annual non-wage labour costs in German manufacturing industry amounted to EUR 21,270 per employee. Put another way, these costs amounted to 77.1% of direct earnings. However, differences between western and eastern Germany persist.

In manufacturing industry in western Germany, annual non-wage labour costs amounted to EUR 22,350 per employee. On average, additional labour costs rose by 3.5% per employee in 2003 compared with 2002. Direct payments for employees increased by 3.1% to EUR 28,580 on average. The ratio of non-wage labour costs to direct earnings rose from 77.9% to 78.2% over the year. This increase was caused, in particular, by higher contributions for statutory healthcare and pension insurance schemes. Dependent employees and employers had to pay 19.5% of gross wages and salaries instead of 19.1% in 2002 towards the statutory pension scheme. Statutory health insurance contributions rose, on average, by 0.3 percentage points to 14.3%. Moreover, the ceiling of 'assessable income' in the statutory pension and unemployment insurance schemes increased by 13%. However, a lower rate of workers’ absence helped to slow, in part at least, the rate of increase in these costs.

In eastern Germany, annual non-wage labour costs rose in 2003 by 3.8% to EUR 13,480. The ratio of non-wage labour costs to direct earnings increased by 0.7 percentage points to 66.9%. As in western Germany, contributions to social security schemes rose significantly. Furthermore, spending on occupational pension schemes increased. Nonetheless, in eastern Germany, non-wage labour costs in absolute terms were still 40% lower than in western Germany. The ratio of non-wage labour costs to direct earnings was more than 11 percentage points lower than in western Germany, owing to large differences that remain in bonus payments and in employer contributions to occupational pension schemes.

Developments in the service sector

In 2003, total annual labour costs in the German insurance sector (EUR 67,130 per employee) and banking sector (EUR 63,160 per employee) were considerably above those in manufacturing industry (EUR 48,860 per employee). However, the retail sector (EUR 34,670 per employee) and wholesale sector (EUR 43,010 per employee) had labour costs below those in the manufacturing sector. In the service sector, non-wage labour costs varied significantly by branch, from EUR 13,710 in retail to EUR 33,930 in the insurance sector - see table 3 below.

**Table 3. Labour costs in German service sector per employee per year, 2000 and 2003**
.	2000	2003
Labour costs (EUR)
Retail sector	31,772	34,670
Wholesale sector	39,662	43,010
Banking sector	56,693	63,160
Insurance sector	61,292	67,130
Of which: non-wage labour costs (EUR)
Retail sector	12,491	13,710
Wholesale sector	15,741	17,160
Banking sector	28,938	32,170
Insurance sector	30,931	33,930
Non-wage labour costs as % of direct compensation
Retail sector	64.8	65.4
Wholesale sector	65.8	66.4
Banking sector	104.3	103.8
Insurance sector	101.9	102.2

Note: Figures refer to companies with at least 10 employees (calculated in terms of full-time equivalent workers).

Source: IW, 2004.

Commentary

IW does not expect large changes in the ratio of non-wage labour costs to direct earnings in 2004. Although risks that additional labour costs will rise in the short term exist, at least no further immediate increases in social security costs are expected for 2004. Nonetheless, the basic problem of very high non-wage labour costs in Germany remains. As high and increasing labour costs tend to encourage substitution away from labour to more capital-intensive methods of production, high and rising non-wage labour costs are an impediment to job creation. Furthermore, some non-wage labour costs such as social security contributions drive a wedge between the labour costs that companies pay and the incomes that workers receive, thus making collective bargaining more difficult. The goal has to be to reduce non-wage labour costs because they increase labour costs and thus reduce the demand for labour. Therefore, reducing social insurance contributions for employees as well as for employers should rank high on the political agenda. (Lothar Funk, Cologne Institute for Business Research, IW)

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