Non-wage labour costs in Germany reach new record high

A recent analysis by the Institut der deutschen Wirtschaft shows that non-wage labour costs in Germany reached a new record high in 1996. From 1972 to 1996, the ratio of non-wage labour costs to direct compensation in west German manufacturing industry rose from 55.6% to 80.7%. The topic of non-wage labour costs is increasingly being discussed among and between the social partners and the major political parties.

Non-wage labour costs

Non-wage labour costs are those categories of the enterprise's total labour costs comprising other than direct compensation. Today, non-wage labour costs account for a very substantial and rising proportion of total labour costs. Since increasing labour costs tend to encourage substitution away from labour to more capital-intensive methods of production, 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 money that workers receive, thus making collective bargaining more difficult. Via unit labour costs - nominal labour costs divided by real value added - non-wage labour costs are likely to have some effect on companies' location decisions.

There are several ways of defining non-wage labour costs. The annual analysis of non-wage labour costs in Germany by the Institut der deutschen Wirtschaft (IW) is based on official statistics from the Federal Statistical Office, which conducts surveys on labour costs every four years (most recently in 1992). The trend extrapolation is based on long-term trends, data from the institutions of the social insurance system, and the annual analysis of collective agreements by the Federal Ministry for Labour and Social affairs. The official statistics distinguish between compensation for hours actually worked and non-wage labour costs. Non-wage labour costs are differentiated into pay for days not worked, special payments, statutory social welfare costs and other non-wage labour costs. The IW differentiates between statutory non-wage labour costs, and non-statutory costs resulting from collective bargaining and additional benefits provided by the employer. However, one should beat in mind that some non-statutory non-wage labour costs - such as holidays - may result from the implementation of labour law and additional collective agreements by the social partners. To a certain extent these kinds of costs might also be attributed to statutory non-wage labour costs.

The development of non-wage labour costs in Germany 1992-6

The table below sets out IW's latest figures on the development of non-wage labour costs over the past five years ("Personalzusatzkosten in der deutschen Wirtschaft", Edmund Hemmer , in IW-Trends 1/97, pp. 44-54.).

Source: Hemmer (1997).

In west German manufacturing industry, non-wage labour costs reached an all-time high of DEM 38,270 in 1996. From 1995 to 1996, the ratio of non-wage labour costs to direct compensation grew by 0.6 percentage points to 80.7% (see table below). The reason for this was the 0.9% increase in social insurance contributions, which was only partly compensated by a drop in total sick pay of 0.3%. Between 1992 and 1996, non-wage labour costs rose by an average of 3.7% per year, while direct compensation increased by an average of 3.5% per year. For the period 1972-96, the respective figures are 6.7% and 5.0%.

In east German manufacturing industry, non-wage labour costs reached DEM 25,980 in 1996. From 1995 to 1996, the ratio of non-wage labour costs to direct compensation grew by 1.3 percentage points to 71.2% (see table below). Between 1992 and 1996, non-wage labour costs rose on average 12.0% per year, while direct compensation increased by an average of 10.8% per year. The rise of non-wage labour costs can be attributed to increases in both the statutory and the non-statutory elements. A special role is played by the increases in the costs of social security contributions, which rose at a significantly higher rate in the east than in the west. Furthermore, increases in costs caused by sick pay, and holidays and holiday payments, were of importance. Though rising steeply, total labour costs in eastern Germany are still about 28% lower and non-wage labour costs almost 33% lower than in western Germany. The differences result from less generous fringe benefits such as vacation and supplementary pension schemes.

* Based on compensation for hours actually worked.

Source: Hemmer (1997).

As regards the service sector, comprehensive data are available only for western Germany. In 1996, the ratio of non-wage labour costs to direct compensation was 77.3% and ranged from 67.1% in the retail trade to 98.4% in the banking sector.

For 1997, the IW predicts a further rise in non-wage labour costs. In January 1997, the contribution rates for all types of social insurance were raised. The overall social insurance contribution rate will increase from 40.2% to 41.9% of gross wage income. Again, statutory non-wage labour costs will rise faster than non-statutory non-wage labour costs.

Commentary

There is widespread agreement among the employers and the main political parties that non-wage labour costs have to be reduced because they drive up labour costs and thus reduce the demand for labour. However, opinions are divided on how to reduce non-wage labour costs. The IW analysis shows that the single most significant influence on the growth of non-wage labour costs has been the increase in the statutory social welfare contributions of employers. This also highlights the interdependencies between labour markets, industrial relations and a social security system which is tied to employment. Therefore reducing social insurance contributions for employees as well as for employers should rank high on the political agenda. (Stefan Zagelmeyer, IW)