German Unemployment and Tax Rates
The latest in free lunch supply-side spin from William Kucewicz actually provides some useful information. For example, his chart of Germany’s unemployment rate distinguishing between the high unemployment rate for East Germany versus the more modest unemployment rate for West Germany. As I gazed at his chart, my first thought was whether German policy would try to promote more investment in this formerly Communist region.
Kucewicz, however, began with a discussion of the cost of labor:
German workers are among the world’s most expensive. According to a recent OECD study, the average German manufacturing worker’s marginal tax rate, including income and social security taxes, is a whopping 40.5 percent. Adding the employer’s social security contributions brings the marginal rate up to 50.7 percent for the average German manufacturing wage earner with no dependents. It’s small wonder, then, that unemployment is nearing the five-million mark.
While it is true that Germany has a large public sector and relatively high marginal tax rates. However, the cost of labor is not the tax rate. Tax rates place a wedge between the before-tax wage and the after-tax wage with most of the incidence of the tax being borne by workers rather than firms unless the elasticity of labor supply is high (see the latest from Jude Wanniski for evidence that the supply-siders don’t even understand their own model). Using this IMF document, we can examine the changes in wages, prices, and productivity (tables 8 and 9) to compare how unit labor costs have evolved in Germany versus the U.S. since 1997. Even though the U.S. has enjoyed faster productivity growth than Germany, its unit labor costs have not risen relative to those in the U.S. as earnings growth has been less.
Kucewicz also notes Germany’s deficit problems and its “anemic private capital investment”. Both are fair points, but they apply equally to the U.S. situation. A commitment to long-term fiscal restraint would be welcomed policy – both in Germany and in the U.S. If the Germans are willing to cut back on the size of their public sector, it might achieve fiscal restraint without large tax increases. Otherwise, I can understand why Angela Merkel is suggesting tax increases.