Labour Demand in Germany: An Assessment of Non-Wage Labour Costs

Abstract:     
The data indicate that non-wage labour costs in Germany have reached a record high in recent years. From 1972 to 2001, the ratio of non-wage labour costs to direct compensation in West German manufacturing industry rose from 55.6 per cent to 81.2 per cent. The topic of nonwage labour costs is increasingly being discussed among and between the political parties because non-wage labour costs are likely to have major negative effects on employment. We follow the real options approach, which allows us to investigate the value to a firm of waiting to adjust labour when the firm's revenues are stochastic and adjustment costs are sunk. Simulation exercises show that the interaction between hiring and firing costs, non-wage labour costs and uncertainty can have important ramifications for employment dynamics.

Number of Pages in PDF File: 25

Keywords: Real Options, Labour Demand, Non-wage Labour Costs, Hiring and Firing Costs, Germany

JEL Classification: D81, J23, J31, J32

working papers series