A recent study by the Institute of the German Economy (IW) indicates a declining competitiveness for German industry despite consistently high productivity levels. The report, released Wednesday, points to escalating labor costs and increasing competition from China as key factors.
The IW highlights unit labor costs as a significant indicator, revealing that in 2024, German industry faced costs 22 percent above the average of 27 industrialized nations. This translates to a roughly 20 percent premium incurred by German companies for wages and salaries per unit produced – a figure surpassed only by Latvia, Estonia and Croatia.
Germany remains among the most productive industrial economies globally, currently ranked seventh among the 27 nations analyzed. The United States is the only major industrial power with higher productivity. However, Germany also holds the third-highest labor costs. The US exhibits 2 percent lower labor costs coupled with a 44 percent higher productivity rate in comparison.
While unit labor costs in Germany grew by 18 percent since 2018, a slower rate than the 20 percent increase observed abroad, gross value added decreased by 3 percent in Germany, while rising 6 percent internationally. German industrial firms experienced reduced sales despite relatively moderate price increases. The erosion of technological advantages, particularly in competition with China, limits the ability of these companies to dictate pricing. High location costs are therefore proving increasingly disadvantageous.
IW economist Christoph Schröder notes that the ongoing labor shortage is driving wages upward, suggesting location costs in Germany will continue to rise in the coming years. He suggests the German government could mitigate these effects by controlling growth in non-wage labor costs and addressing demographic challenges. Without reforms to the social security system, Schröder warns, Germany risks a gradual deindustrialization.