By Nina Adam
FRANKFURT--Spiraling German labor costs are starting to
undermine the country's famed competitiveness, threatening to hurt
economic growth and investment in Europe's largest economy.
Propelled by a healthy economy and record-low unemployment,
labor costs here are rising fast, as the government has further
tightened its grip on the labor market, driving up companies' wage
bills.
Official German data published this month showed that real wages
in the first quarter rose at their fastest rate since late 1992,
when wages in East Germany shot up following the country's
unification, and much faster than the eurozone as a whole.
German businesses say they are feeling the pinch, but in Berlin,
politicians have ignored a trend economists and managers warn that,
if left unchecked, will hit growth and employment levels.
"Rising labor costs is the most critical issue," said Martin
Kapp, the chief executive at machine-tool maker KAPP
Werkzeugmaschinen GmbH, who said he expects increases in personnel
expenses, which include wages as well as contributions to social
insurance, retirement and health care, among other costs, to rise
about 30% over the next 10 years.
Wage moderation and a move toward more flexible labor contracts
early this century--which allowed businesses to fire employees more
easily and led to an increase in temporary employment--turned the
German economy from one of the world's most expensive manufacturing
bases in the late 1990s into one of its most formidable exporters
today.
But recurrent strikes in sectors including transportation,
education and health care, coupled with sizable wage increases this
year, have highlighted an accelerating trend that critics warn will
exacerbate any economic downturns.
"In four to five years [from now], Germany may have lost the
competitiveness it gained by wage moderation over the past decade,"
said Jörg Krämer, Commerzbank's chief economist. Germany could end
up in a position "similar to France today," he said, where an
inflexible labor market and extensive regulation are hurting
growth, jobs and investment.
Christian Kohlhaas, who runs a construction company near
Koblenz, said labor costs have risen about 15% in the past four to
five years as wages have shot up and regulatory requirements have
tightened.
Although senior civil servants and economists have been warning
about an erosion in German competitiveness, most of the economic
measures Chancellor Angela Merkel's government enacted in the past
two years have increased labor-market regulation.
Berlin this year introduced a statutory minimum wage of
EUR8.50-an-hour ($9.34), tightened collective-bargaining rules, and
is widely expected to introduce stricter limits on temporary
employment.
"Germany's national industry and politicians have never been
more alienated in recent history than today," said Reinhold Festge,
president of the VDMA engineering federation, which represents more
than 3,000 midsize companies.
On average, unit labor costs--which gauge labor
productivity--have risen 2.4% each year since 2012, while they fell
1.3% and 4.1% annually in Spain and Greece, respectively, according
to data from the Organization for Economic Cooperation and
Development, a sign the country is fast losing ground to other
eurozone members that have clamped down on wage excesses in the
wake of the region's debt crisis.
Last year, negotiated wages here increased 2.9%, or about twice
as much as in France, the eurozone's second-largest economy,
according to the federal statistics office.
A recent survey by the DIHK Chambers of Commerce and Industry
showed half of the companies polled consider rising labor costs as
a major risk to their business.
"Germany is gambling away its competitive advantage vis-à-vis
the eurozone," DIHK economist Dirk Schlotböller warned.
Healthy global demand, a weaker euro exchange rate and European
Central Bank measures to prop up the region's economic activity
have cushioned the effects of rising labor costs on Germany's
economic upswing. At a rate of 4.7%, according to International
Labor Organization standards, joblessness here is the lowest in the
entire eurozone and job vacancies are near records.
But analysts warn that sliding German competitiveness would also
leave the economy weakened and take the pressure off other eurozone
countries to accelerate badly needed overhauls.
Mr. Kohlhaas said spiraling wages and more regulation are
manageable now because of healthy orders, but they could make the
next downturn hard to overcome.
Faced with mounting labor costs, companies have had to choose
between protecting their margins or their market share. Commerzbank
research shows that firms haven't been able to raise prices enough
to compensate for the extra costs--a trend that has eaten into
profitability.
"Rising wages are, of course, a cost driver and we've got to
react to this by ramping up efficiency both in terms of production
and purchasing, " said Sven Schmidt, press officer at Leoni AG, a
manufacturer of wires, optical fibers and cable systems.
The World Bank's Doing Business 2015 report shows that many
European countries have accelerated overhauls in recent years,
while Germany has been treading water.
"Germany is fine for now. But it will have to move forward to
prevent other countries from surpassing it," said Rita Ramalho, the
report's lead author.
Write to Nina Adam at nina.adam@wsj.com