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German labor costs climb

September 8, 2015

German hourly wages have risen sharply compared to the European average. Although many analysts see this as a positive driving force for the economy because it lifts consumer spending, some warn of risks.

Audi Produktion Ingolstadt Archiv 2013
Image: Getty Images

German labor costs rose between April and June, the third consecutive quarter to book a year-on-year increase. Hourly wages rose 3.1 percent in the second quarter compared to the same period last year, the federal statistics office Destatis announced on Tuesday.

In addition, gross wages were up 3.4 percent while non-wage benefits increased by 2 percent.

The latest figures reflect Germany's robust growth, seen by its rising surplus and low employment, which have prompted labor unions to call for pay increases and a reduction in working hours.

Good for business - with caveats

Employers and trade unions agree that higher wages boost purchasing power and consumption.

"This gives more space for private demand in Germany," said Rainer Bispinck from the Institute of Economic and Social Research, adding that higher domestic consumption reduces the country's dependence on exports.

But some employers are worried that rising wages could affect their global price competitiveness.

"Companies need to make profits in order to invest," said Christoph Schroeder from the Cologne Institute for Economic Research, which has close ties to major corporations. He noted that wages are expected to rise for the fourth year in a row in 2015.

With pay raises written into new contracts, the ability of employers to flexibly lower costs is reduced. That could cause problems for German corporations, if the pace of growth in China and other emerging economies slows in coming months, Schroeder said. Options for containing costs would then be limited to restraining bonus payouts.

It's all relative

Although higher than the EU average of 2.5 percent, Germany's wage increase was not the highest within the 28-member bloc. Labor costs in Latvia, Romania and Bulgaria were up around 7 percent - but from a much lower base: the three countries have much lower hourly wages than those in Germany.

Cyprus was the only country to register a decline in labor costs, which were down 1.8 percent year-on-year in the quarter.

el/nz (Reuters, dpa, Destatis)