Home » Productivity in Germany is falling – that’s why it’s so alarming

Productivity in Germany is falling – that’s why it’s so alarming

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Productivity in Germany is falling – that’s why it’s so alarming

Productivity in Germany is declining. This is an alarming signal for the country.
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In Germany, labor productivity has continued to fall. In the first quarter, it was one percent lower than a year ago, according to the Institute for Labor Market and Occupational Research (IAB).

The number of employees rose slightly to 45.6 million. The number of hours worked also increased. And sick leave was higher than ever.

The drop in productivity is alarming. In the short term, it points to a recession. In the long term, productivity in the country urgently needs to increase in order to ensure prosperity – especially since many people want to work less.

In Germany, more people are currently employed than ever before. In the first quarter of 2023 there were a good 45.6 million, around one percent more than a year ago. The problem: The result of their work did not grow with them. Productivity was one percent lower in the first quarter than a year ago, it calculated Institute for Labor Market and Vocational Research (IAB).

This is bad news in more ways than one. First, because it’s not a blip. Productivity in Germany has been weak for some time. Secondly, it points to poor utilization of many companies and thus to one economic downturn there. And thirdly, in an aging country like Germany, which is poor in raw materials, productivity would have to rise significantly in order to ensure prosperity – especially since many people would like to work less instead of more.

volume of work increasesproductivity falls

While the number of people in employment in Germany increased, the average working time fell slightly. It fell by 0.1 percent to 345.1 hours. As a result, the overall economic volume of work increased. In the first quarter, 15.7 billion hours were worked in Germany, 0.9 percent more than a year ago.

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People worked longer, but economic output declined. The Gross domestic product (GDP) was 0.5 percent lower in Germany in the first quarter than a year ago. So more people worked more hours overall, but produced goods and services at a lower value. Productivity per hour worked fell. And not for the first time. “After productivity had dropped significantly at the beginning of the Ukraine war, it dropped again at the beginning of 2023,” explains Enzo Weber, head of the IAB research department for forecasts and macroeconomic analyses.

There are several effects behind this: Many companies suffer from a lack of workers and skilled workers. For this reason, they keep their staff even in the tense economic situation – and even continue to hire if they find suitable candidates. “Despite the recession more employment was built up and scarce staff kept,” explains Weber, but at the same time: “The Inflation Consumption is depressing, the high energy prices are causing production to fall.” Companies produce less with the same workforce: productivity falls.

The falling productivity points to a worse capacity utilization of the companies – and thus a decline in economic output. Germany has been in recession since the first quarter of 2023.

That is why productivity is so important for Germany

In the long term, falling productivity is alarming for any economy. Productivity growth is an essential factor in the prosperity of a society. It determines, for example, the economic leeway that is available for wage and salary increases or for a reduction in working hours.

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Increasing productivity is particularly important for countries with an aging population that is itself shrinking. In the future, they will have to both generate prosperity with fewer workers and pay higher costs for pensions, health and care. The lower productivity grows, the more such countries are dependent on immigration into their labor market. Or people would have to work more themselves, either through more hours per week or a longer working life, for example through a later start of retirement.

In Germany, on the other hand, the desire to work less and less time than more and longer work is more widespread. The four-day week is popular. The SPD has even set itself the goal of a 25-hour week with full wage compensation. This would only be possible with a very strong increase in productivity.

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Even without shorter working hours, the working population in Germany will shrink sharply in the next few years. This is because more people from the baby boomer cohorts are retiring than younger people are entering the workforce. In order to maintain prosperity alone, Germany needs 400,000 to 500,000 net immigrants into the labor market every year. The shortage of workers is already noticeable. In the fourth quarter, more than 1.7 million jobs were open in companies.

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All of these challenges will increase if productivity doesn’t increase.

In the early years of the Federal Republic, productivity initially rose sharply. This made possible both rising wages and salaries and shorter working hours. After reunification, productivity rose again significantly because companies with lower productivity in East Germany were modernized or closed. Since then, productivity growth has been declining.

There are other notable developments: the part-time rate increased year-on-year by 0.4 percentage points to 38.8 percent. At 2.1 percent, the number of part-time employees increased significantly more than that of full-time employees at 0.6 percent. According to the IAB, this is also due to the fact that employment in sectors with a high proportion of part-time work, such as the hospitality industry or the education and training sector, increased particularly strongly.

Sick leave rose to an all-time high of 7.11 percent in the first quarter of 2023. That was once again significantly more than the already very high level of 6.36 percent in the same quarter of the previous year. One reason could have been the wave of colds after the end of the corona pandemic. At the same time, the uncertainties caused by the economic situation and the war in Ukraine as well as growing pressure in companies are blamed for the higher sick leave. The combination of work pressure that is perceived as higher and simultaneously falling productivity would also not be a good finding for an economy and a society.

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