Germany has a labour cost problem. The hourly wage costs of industrial workers have increased in the last twenty years by almost 40% in real terms. This is more than in most other countries and has weakened Germany's competitiveness. The hourly wages of German industrial workers are the highest in the world, and they exceed the wages of competitors in East Asia and in Eastern Europe several times over. This is a growing problem for the German economy. It explains the record number of current bankruptcies and the numerous re-locations of medium-sized businesses abroad, which are often the last chance for survival.

Wages can be higher than elsewhere to the extent that German producers are better than others. To restore competitiveness, it is not necessary for wages to fall back to the Polish level. But it would be good if the gap to a country such as the Netherlands, which has built up over the last twenty years, could be closed again. Dutch wages have increased by only 23%, and Holland has achieved a high level of employment despite the lull in the world economy. German labour costs would have to fall by around 12% per hour to match this.

That could almost be reached if employer contributions to pension insurance, unemployment insurance and to nursing care insurance were charged to employees, or if employees paid for the employer contributions to pension and health insurance. Alternatively it would suffice if wage increases were held to one percentage point below productivity increases for 11 years. However, these alternatives will hardly find the acceptance of employees and their unions.

The only other reasonable choice is extending working hours. An 11% lengthening of working hours would give enterprises the cost savings that would offset the disadvantages built up over twenty years vis-à-vis the Netherlands. Eleven percent longer working hours means an increase of the working week by around four hours. Most employees would then work 42 instead of 38 hours a week. This is not the end of the world. It would restore working hours to the level they had twenty years ago.

In an international comparison, this would also not put Germany in an extreme position. Today Germany has the third lowest annual working hours of OECD countries. If Germans worked 11% more, this would place them in the middle range at 1,628 annual working hours, still less than countries like Great Britain, Finland, Ireland or Spain. They would be at about the Italian level, which is still compatible with a dolce vita. Isn’t it worth trying?

Hans-Werner Sinn
Professor of Economics and Public Finance
President of the Ifo Institute

Published as "Wieder 42 Stunden arbeiten", Frankfurter Allgemeine Zeitung, July 23, 2003, p. 11.