_ Yuri C. Kofner, Economist, MIWI Institute. Munich, May 1, 2024.
On Labor Day, working conditions and workers’ rights come into focus in public discourse. A blanket, almost crude demand often raised by left-wing parties, Greens, and the SPD is for wage increases for workers. But is this truly the panacea for securing skilled labor, as it is often portrayed?
The Demand for Wage Increases
The demand for wage increases is not new and is not only raised by openly leftist groups. In 2023, even the President of the ifo Institute, Clemens Fuest, and the Director of the Institute for the Future of Work, Simon Jäger, suggested simply paying higher wages where there is a shortage of skilled workers. [1]
Indeed, nominal wages in Germany have increased by nearly a quarter (24 percent) over the last decade. However, due to the COVID-19 restrictions and the recent surge in prices between 2020 and 2023, real wages have plummeted by an unprecedented 5.1 percent. This has negated the welfare gains of the working population since 2014.
The Issue with Wage Increases
The reaction of “simply paying higher wages” is not as straightforward and promising as claimed.
Nominal wage increases without real productivity growth are only eaten up by current inflation and lead to further price increases in the future.
For instance, the significant jump in the minimum wage from 10.45 to 12 euros per hour in 2022 only fueled inflation further [2] and did not help close the skills gap, especially affecting more demanding positions requiring sufficient qualifications.
Wage increases serve as a natural market signal for companies in response to labor scarcity and thus do not require further state intervention. The fact that this does not happen to the desired extent is less due to the supposedly “perfidious” interest of entrepreneurs in keeping their profit margins as high as possible, but rather due to the increasing share of tax and bureaucracy costs in business expenses.
Since Angela Merkel’s (CDU) assumption of office in 2005, Germany’s tax and contribution burden compared to GDP has risen from 34.4 to 40.7 percent in 2022, consistently ranking in the top third among OECD countries.[3] In 2023, income taxes and social contributions accounted for 47.9 percent of the labor costs of an average single person, placing Germany second behind Belgium.[4]
In 2017 (unfortunately, Destatis discontinued the relevant data collection thereafter), statutory social costs and tax expenses accounted for between 4.1 and 5 percent of the cost structure of SMEs in the manufacturing sector in Germany.[5]
To be able to pay higher wages, entrepreneurs should therefore be relieved of tax and bureaucratic burdens. Studies on labor markets in Norway,[6] Finland,[7] and Sweden [8] have all concluded that reducing income tax creates new jobs and sometimes increases wage levels.
The Limits of Wage Increases
Economists at the IW Cologne rightly point out that work is typically a service with inelastic substitutability.[8] An unskilled baker’s assistant cannot simply switch to a job as a skilled IT specialist in automotive manufacturing just because it pays better. Therefore, a wage increase in shortage occupations would have only a limited effect in a market situation where qualified labor is simply not available. Initially, sufficient retraining and upskilling of differently or unqualified workers would be required.
Finally, it must be said that Germany already has quite high unit labor costs in manufacturing compared internationally (7th place in 2021).[9] Further wage increases without real productivits growth would further deteriorate Germany’s competitiveness.
Conclusion
On Labor Day, we should not only discuss wage increases but also the conditions that enable companies to pay higher wages. These include reducing the tax and contribution burden, cutting bureaucracy, and better qualifying the workforce. Only then can we ensure that work in Germany retains its value in the future.
Sources
[1] Fuest C., Jäger S. (2023). Gegen den Fachkräftemangel: Mehr Lohn als Mittel. FAZ. URL: https://www.faz.net/aktuell/karriere-hochschule/buero-co/gegen-den-fachkraeftemangel-mehr-lohn-als-mittel-18721012.html
[2] Link S. (2022). Erhöhung des Mindestlohns lässt Preise steigen. ifo Institut. URL: https://www.ifo.de/pressemitteilung/2022-09-09/erhoehung-des-mindestlohns-laesst-preise-steigen
[3] BMF. (2024). Abgabenquote¹ in Deutschland von 1991 bis 2023. URL: https://de.statista.com/statistik/daten/studie/157905/umfrage/entwicklung-der-abgabenquote-in-der-deutschland-seit-1991/
[4] OECD (2024). Taxing Wages 2024. Tax and Gender through the Lens of the Second Earner. URL: https://www.oecd.org/tax/taxing-wages-20725124.htm
[5] KMU machen 97,7 Prozent aller Unternehmen im Verarbeitenden Gewerbe aus. | Destatis (2019). Kostenstruktur der Unternehmen des Verarbeitenden Gewerbes. 2017. URL: https://www.destatis.de/DE/Themen/Branchen-Unternehmen/Industrie-Verarbeitendes-Gewerbe/Publikationen/Downloads-Struktur/kostenstruktur-2040430177004.html
[6] Ku, H. et al. (2020). Do place-based tax incentives create jobs? University College London. URL: https://doi.org/10.1016/j.jpubeco.2019.104105
[7] Benzarti Y., Harju J. (2021). Using Payroll Tax Variation to Unpack the Black Box of Firm-Level Production. University of California. URL: https://doi.org/10.1093/jeea/jvab010
[8] Saez E. et al. (2019). Payroll Taxes, Firm Behavior, and Rent Sharing: Evidence from a Young Workers‘ Tax Cut in Sweden. University of California. URL: https://doi.org/10.1257/aer.20171937
[9] Burstedde A., Werner D. (2023). Fachkräftemangel – keine einfache Lösung durch höhere Löhne. IW Köln. URL: https://www.iwkoeln.de/studien/alexander-burstedde-dirk-werner-fachkraeftemangel-keine-einfache-loesung-durch-hoehere-loehne.html
[10] Schröder C. (2022). Lohnstückkosten im internationalen Vergleich. Kostenwettbewerbsfähigkeit der deutschen Industrie in Zeiten multipler Krisen. IW Köln. URL: https://bit.ly/43EUXKp