Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Certainly in Germany when people talk about the labor market being inflexible what they mean is that people are less willing to pull up stakes and move. But is this a bad thing? Certainly not from a social point of view.

As regards costs, die Zeit has recently published several articles contrasting how Germany and the Scandinavian countries finance social benefits. Germany finances these primarily through wage deductions and matching employer contributions, whereas Scandinavia pays for these through high personal income taxes and VAT rates. The result is that German social benefits represent a 42% surcharge on wages. Meanwhile, unemployment in Denmark and Sweden is running around 5.5%.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt št gmail dotcom) on Tue Jun 21st, 2005 at 12:51:35 PM EST
How do the total costs of employment compare? If I employ a programmer in Germany, does it cost me 42% more than in Scandinavia?
by Colman (colman at eurotrib.com) on Tue Jun 21st, 2005 at 01:10:27 PM EST
[ Parent ]
Yes and no. You have to turn the question round and ask what return you would get from providing the programming service if you located in Germany compared to say Denmark (there are reasons for this choice by the way)

Without have the Die Zeit figures and an explanation avaiable I will have to give generalised answers. Taking the post at face value, if direct taxes on employemnt and the overhead caused by social provisions in Germany total 42%, what is the comparable figure for Denmark and what is included in the calculation? Or is the German figure 42% greater than the equivalent in Denmark - a rather different statement.

Apart from that you have missed two important factors. While tax on the employer is lower, taxes on the employee are higher to partly make up the funds necessary to pay for the social provisions. Indirect taxes (VAT) are also higher to provide the other part of the equation. The difference between the countries are listed here but if you look up the rates you will see Germans pay VAT at 7% on food and 16% for other goods and services compared to 25% for both in Denmark. The employee therefore pays far more for their living expenses and higher direct taxes from their pay packet. The implication of this is that to attain the same real buying power, the Danish worker would expect to be receive a higher basic rate of pay.

The extra VAT also affects the amount the business would receive from selling its services. For a simple comparison this is often referred to as a "purchase tax" when explaining it to Americans. As alluded to earlier, the tax is paid on all goods and servicess. Not explained is that the amount collected is offset by the amount already paid out. So if in Denmark you buy an item for 100 Euro and sell it for 300 Euro, you pay over 25% of the diffence of 200 Euro, hence "value added".

This is where the returns question comes back into play with your example. Programming is a high value added industry, if only because it is heavily dependent on labour costs. In either country you would have to pay VAT on a very high proportion of the final charge however the rate is much higher in Denamrk. So whereas in Denmark you might expect to hand over say 20% of the  contract charge as VAT, in Germany it would be nearer 12%.

So in summation, as an employer your would hand over more in direct taxes on the wages you pay in Germany but in Denmark you would have to pay your employees more and hand over more in indirect tazes. While you are deciding, you may want to employ someone in a Baltic state or Slovakia where there are still much lower wages (for the moment) and some very highly skilled workers.

by Londonbear on Tue Jun 21st, 2005 at 03:03:57 PM EST
[ Parent ]
The most recent die Zeit article on the subject is here.

Here is a brief excerpt that I think frames the issue fairly well (xlation m.o.):

In fact, for some time now, experts have distinguished between three different models for national social systems:

  • the Anglo-Saxon model, in which the state organizes large portions of the society such as education and health through private means and social security is restricted to preventing destitution;

  • the continental European model, in which a large portion of social benefits is financed through contribution payments from employers and their employees rather than taxes;

  • the Scandinavian model, in which the welfare state is financed primarily through taxes and self-employed and marginally employed persons are also entitled to comprehensive social benefits.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt št gmail dotcom) on Wed Jun 22nd, 2005 at 02:30:02 AM EST
[ Parent ]
...they do so at their peril.

"On the Internet, nobody knows you're a dog." - Peter Steiner
by dryfly (jjwhodat at hotmail dot com) on Wed Jun 22nd, 2005 at 08:10:24 AM EST
[ Parent ]
Here's an interesting perspective that argues that the type of welfare state a country has affects job growth (the article is 8 years old so the labor market stats may be somewhat different now):

European Distinctions

Fritz W. Scharpf
Boston Review
Summer 1997

. . . To compare the employment performance of two groups of countries the best available measure in my view is the "employment/population ratio." This ratio is defined by the number of persons actually working compared to the working-age population between 15 and 64. Taking the latest available OECD data for 1995, both groups of countries are quite heterogeneous.

  • The United States, it is true, is doing very well indeed, providing jobs for 73.5 percent of the working-age population. But the other members of that club (which is defined by flexible labor markets, low levels of welfare support, and great inequality) are not nearly as successful in employment terms--69 percent in Australia, 67.8 percent in the UK, and 67.7 percent in Canada.

  • On the other side, it is true that some European welfare states have still much lower employment/population ratios: 55.7 percent in Belgium, 59.5 percent in France, 64.3 percent in the Netherlands, 65.1 percent in Germany.

  • However, the European group also includes Sweden, with an employment level of 71.1. percent; Denmark, which at 73.4 percent practically equals the U.S. record; and Norway, which at 74 percent is even ahead of the United States in terms of employment. . . .

Moreover, it is precisely in these high-performing countries where the factors . . . that . . . should explain the European job deficit [are most manifest]: extremely high taxes, very generous welfare states, strong unions, and highly regulated labor markets.

So what gives? The answer is to be found in different structures of employment and in different types of generous welfare states. . . . High-employment countries are countries with a large number of jobs in service sectors that are sheltered from international competition. The most successful countries, however, seem to achieve their success in radically different ways:

  • In America, low levels of taxation, weak or nonexistent unions, and low or nonexistent social assistance allow large numbers of rich consumers to buy in the private market the services of large numbers of poor workers who must offer their services at very low wages. The unsolved American problem . . . is poverty.

  • In Scandinavia, by contrast, very high levels of taxation, strong unions, and generous social assistance have prevented the expansion of private services. High levels of employment are nevertheless achieved because Scandinavian-type welfare states are service-intensive, providing large numbers of public-service jobs in child care, education, health care, care for the elderly, and other social services--including jobs that do not require very high levels of formal training. The unsolved problem, as Sweden has found out in the 1990s, is taxpayer resistance that leads to large public-sector deficits and to an increasing need for fiscal retrenchment--which in turn explains rising levels of unemployment.

  • The continental welfare states, then, have the worst of both worlds: Public sector employment is as low in Germany as it is in the United States, and employment in private services is almost as low as it is in Sweden. The reason is straightforward: While taxes are not quite as high in Germany as in Sweden (but still much higher than in the United States), the welfare state is mainly financed through payroll taxes, rather than from the general tax revenue. At the same time, unions are strong and wage inequality is nearly as low as it is in the Scandinavian countries. Thus, private service jobs with low skill requirements (and low labor productivity) are as effectively priced out of the market as they are in Sweden. But in contrast to Scandinavia, continental welfare states are "transfer intensive," rather than "service intensive"--providing generous levels of income support in case of sickness, old age, disability, and unemployment, but not much in the way of child care, family, and social services. The result is a very low level of service employment, high taxes and welfare burdens that are rising as unemployment increases, and a growing underclass of welfare recipients without any realistic prospect of ever finding gainful employment.

Thus, we have . . . three [tracks]: American, Scandinavian, and continental European. All have their characteristic difficulties. . . .  
by TGeraghty on Wed Jun 22nd, 2005 at 02:54:44 AM EST
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