Bucking the Crisis? Germany's Labor Costs Rise as Unemployment Drops

Concerns that German jobless rates would climb this year have so far proven unfounded: The unemployment rate dropped unexpectedly in March. Even the recent spike in labor costs may be but a statistical blip caused by the country's short-time work program.

Germany's unemployment rate dropped surprisingly in March.

Germany's unemployment rate dropped surprisingly in March.

French Finance Minister Christine Lagarde could hardly have been clearer in her interview with the Financial Times two weeks ago. Germany, she said, should increase domestic demand to help struggling European Union countries improve their competitiveness.

In addition to slamming Berlin for its export surplus, Lagarde also said: "When you look at unit labor costs in Germany, they have done a tremendous job (keeping them low). I'm not sure it is a sustainable model for the long term and for the whole of the (euro) group. Clearly we need better convergence."

On Tuesday, statistics released by Germany's Federal Statistical Office made it seem as though Lagarde has gotten her wish. In 2009, labor costs in Germany spiked by 4.1 percent, a steeper climb than in most other European Union countries. Whereas an hour of labor cost German companies on average €29.70 ($39.94) in 2008, that number rose to €30.90 in 2009.

"The climb was the most rapid since the labor cost index began in 1997," said Ralf Drossard, who led the study.

An Unexpected Drop

But at second glance, Tuesday's numbers may not be an indication that Germany's labor market is losing its flexibility. For one, the country's Federal Labor Agency on Wednesday announced that Germany's unemployment rate unexpectedly dropped in March. The total of 3.568 million jobless is 75,000 fewer than in February and 18,000 fewer than in March of last year -- for an unemployment rate of 8.5 percent.

For another, the rise in German labor costs appears to have resulted almost entirely from the country's short-time work program, a program instituted to help the country avoid massive layoffs during last-year's recession. The result was that, even as the government helped pay workers on the program, employers were still responsible for coming up with a third of the salaries for employees no longer laboring on the assembly lines. The result was a nominal loss in productivity and a concurrent rise in labor costs.

"The steep climb in labor costs is not a structural problem," said Roland Döhrn, an analyst at the Rhine-Westphalia Institute for Economic Research (RWI). "It can be almost completely accounted for by the fact that almost a million Germans were on the short-time work program."

Indeed, in the fourth quarter of 2009, labor costs in Germany rose by a modest 1.2 percent, just half as much as the rate for all of Europe, which was 2.4 percent. In the euro zone, the rise was 2.2 percent.

The short-time work program has been praised for allowing Germany to avoid a sharp increase in unemployment as a result of last year's economic downturn. Experts had been warning that the country's jobless rate could rise this year as the program came to an end despite the country's return to (modest) economic growth. But Wednesday's numbers were a surprising indication that such a scenario may not come to pass.

'Too Pessimistic'

"The developments on the labor market are a minor miracle given the economic crisis," Andreas Scheuerle, an economist with DekaBank, told the German news agency dpa. "All forecasts were too pessimistic."

Wednesday's jobless numbers solidify Germany's spot as the leader of the European pack when it comes to employment. The unemployment rate for the entire 27-member EU hovers at 10 percent, with the euro zone posting a 9.6 percent level, its highest level in 12 years, according to the European statistics agency Eurostat on Wednesday. France's jobless rate is 10.1 percent with Spain struggling under the burden of a 19 percent unemployment rate. Eurostat's Wednesday numbers, which are for February, show Germany with a 7.5 percent jobless rate, the difference with German statistics resulting from different methods used in calculating the unemployment rates.

Still, Germany isn't out of the woods yet. "We are not seeing a trend reversal," said Federal Labor Agency head Frank-Jürgen Weise on Wednesday. "We are seeing that the development is a bit better than expected." Labor Minister Ursula von der Leyen said: "We can't get overconfident. We are in limbo at the moment."

And despite the good news from the unemployment office, German workers would appear to be the losers of last year's developments on the wage front. The Federal Statistical Office this week announced that real wages, which have been falling in Germany for years, dropped a further 0.4 percent in 2008.

cgh -- with wire reports


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