Real Wage Losses Pushed Employment to a Record High in 2023
CommentArticle on the Role of Real Wage Losses for Employment Dynamics
Throughout 2023, approximately 45.9 million people in Germany were in employment, the Federal Statistical Office reported in its first 2024 press release, a significant increase on the 45.6 million employed the previous year. This figure is unprecedented in Germany and somewhat surprising given the sluggish economy. Experience indicates that due to technological progress, gross domestic product (GDP) must increase by one per cent to maintain the same level of employment. In 2022 and 2023, however, GDP grew only by 0.5 per cent per year, which is why employment should have fallen.
So, how is it possible that employment has reached an all-time high? Several reasons may account for this unexpected development.
Higher employment due to immigration and remote work
On the supply side, both significant immigration in recent years and a rise in the retirement age have contributed to increasing the pool of available workers. In addition, technological progress has facilitated flexible remote working, enabling tasks to be completed from home instead of the office. This flexibility not only saves commuting costs but also allows more people to work part-time.
Falling real wages increase demand for labour
On the demand side, the decrease in real wages played a crucial role in the surge in employment. Between 2021 and 2022, real wages fell by 4.1 per cent, as calculated by the Federal Statistical Office. This decline, which is unprecedented in Germany, has stabilised labour demand despite economic stagnation and contributed to the current employment peak. Assuming a wage elasticity of 0.3 (an average value from research), a 4.1 per cent decrease in real wages in the overall economy resulted in a 1.23 per cent rise in employment. So, with an average employment of 45.6 million people in 2022, lower real wages alone contributed to about 560,000 additional people in employment.
With the recent collective bargaining agreements bringing substantial nominal wage improvements, the decline in real wages may have come to an end over the course of 2023. As a result, the significant employment impulses from lower real wages, which have had a stabilising effect despite a stagnating economy, will gradually fade. If the economy does not pick up in 2024, employment is likely to fall.
Work volume per capita decreased
In addition to the surge in employment, the overall economic work volume has increased in recent years. However, official data only extends to 2022. The table presents the employment figure and the total work volume in hours for 2012 and 2022. Employment includes the self-employed and employees (including civil servants), which constitute the larger subgroup. The table also shows the specific values for employees and the work volume contributed by this subgroup, with the last row containing the growth rates.
While the number of employees climbed by 11.2 per cent (plus 5.2 million), their work volume rose by 7.7 per cent (plus 3.9 billion hours). With the significant increase in employees and a more modest rise in work volume, the work volume per capita has thus decreased on average.
Decline in self-deployment as a cause
Furthermore, the table reveals that total employment grew by 8.6 per cent (plus 3.6 million), slightly less than the proportional increase in employees. The volume of work done by individuals in all employment types went up by 3.2 per cent, less than the surge in employment. The lower percentage increase in total employment is due to the drop in self-employment between 2012 and 2022.
As recent ZEW studies confirm, entrepreneurial activity has fallen in recent years. Fewer people are opting for self-employment, choosing instead to become employees. As self-employed individuals on average work more hours than employees, the decline in self-employment has contributed to a decrease in the overall work volume per capita.
