A recent study by the Institute of the German Economy (IW) indicates a decline in the competitiveness of German industry despite maintaining high productivity levels. The report, released Wednesday, identifies rising labor costs and increased competition from China as key factors contributing to this trend.
The IW highlights unit labor costs as a significant indicator of competitiveness. In 2024, these costs in German industry were 22 percent above the average of 27 industrial nations. This means German companies had to spend roughly one-fifth more on wages and salaries to produce a single unit compared to their competitors. Higher costs were only observed in Latvia, Estonia and Croatia.
German industry remains among the most productive globally, ranking seventh among the 27 countries analyzed. Only the United States demonstrates higher productivity among major industrial powers. However, Germany also ranks third highest in terms of labor costs. The IW notes that while US labor costs are two percent lower, productivity is 44 percent higher than in Germany.
Since 2018, unit labor costs in Germany have increased by 18 percent, lagging behind the 20 percent growth seen abroad. Simultaneously, while gross value added increased by an average of six percent in other nations, it declined by three percent in Germany. Despite comparatively modest price increases, German industrial firms experienced a decrease in sales volume. The study suggests a diminishing technological advantage – particularly in relation to Chinese competition – limits the ability of German companies to dictate pricing. This, combined with high location costs, presents a growing disadvantage.
IW economist Christoph Schröder warns that the ongoing skilled labor shortage will likely continue to drive up wages, leading to further cost increases for businesses operating in Germany. He suggests the federal government could mitigate this by moderating growth in non-wage labor costs and addressing demographic challenges. “Without reform of the social systems, the location will gradually slide into deindustrialization” Schröder stated.
