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Are Germany's Generous Benefits Bad for Business?

April 24, 2003

Companies in Germany must shell out as much as an additional 81 cents in benefits and insurance costs against each euro they pay in wages to employees. Critics say this is hurting an already depressed labor market.

Germans lead comfortable lives -- even in their golden years -- but it comes at a great cost to many companies.Image: AP

With a stagnant economy and more than 4.6 million unemployed workers, the country's labor market has shrunk dramatically. Many employers complain that the social insurance contributions companies are required to make as well as payment of generous benefits most German workers are accustomed to, make it difficult for companies to grow.

The proof is in the pudding: For every euro an employee earns in the industrial sector in western Germany, the employer pays an average of 81 cents toward that worker's social insurance and other benefits. Whether referred to as ancillary wage costs, supplementary personnel costs or a "second wage," non-wage labor costs represent the benefits and costs covered by both private- and government employers that are in addition to the normal salary paid to an employee.

The biggest chunk of an employer's contribution goes to an employee's social insurance -- which includes a state pension plan, health care and both unemployment and nursing care insurance. In most cases, the amount an employer pays on behalf of an employee to the social insurance system is equivalent to 42 percent of the person's direct salary. Taken together, these costs total an average of €22,000 per year for each worker.

Politicians want cuts

Leaders of two of Germany's major political parties acknowledge there is a problem. The opposition Christian Democratic Union, led by national chairwoman Angela Merkel, has called for a reduction of non-wage labor costs. And Wolfgang Clement, Germany's Social Democratic "superminister" for Labor and Economics, is on the record saying that reductions in non-wage labor costs are necessary to "rekindle" investment in the country.

The costs can be staggering. At banks and insurance companies, where salaries tend to be more generous, the "second wage" can sometimes be even higher than the worker's traditional salary. Non-wage costs at German banks are the highest in the country, averaging 101.7 percent of an employee's salary. The percentage is slightly less for the insurance sector, but it still towers far above other industries. Non-wage costs are lowest in the wholesaling sector, where they average about 68.9 percent of salaries.

A disconnect

In addition to social insurance, companies are also made to foot the bill for statutory industrial injury insurance. Employers are also expected to cover the first six weeks of an employee's wages and social insurance premiums during a period of extended illness before the state takes over the responsibility -- even if those days fall during a person's vacation or on national holidays.

A number of one-time annual payments must also be considered in calculating any non-wage costs. German law also requires that employers also pay social insurance premium's for 13th and 14th-month bonuses, further driving up non-wage costs. Other line items often include subsidies for employee cafeterias, workplace daycare centers, work-related field trips, vocational training and part-time work during an employee's final years and other forms of early retirement.

East-west divide

Considerable regional differences exist in non-wage labor costs across Germany. As with salaries, costs tend to be lower in the formerly communist eastern German states than in industrial western half of the country. In eastern Germany, non-wage labor costs average approximately €12,855 per person, or 68 percent of direct wages and earnings. The primary reason for the divide is that there are fewer large companies in eastern Germany. Massive western German corporations, like DaimlerBenz or Bayer are especially generous when it comes to social benefits, and supplementary personnel costs generally run higher.

That trend hasn't gone unnoticed by investors. Many companies that invested in the reconstruction of eastern Germany did so insisting that they not be tied to the kinds of generous benefit packages that have long burdened many companies in western Germany.