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[Tichys Einblick] Non-wage labor costs are reaching a dangerous fever pitch.

The Federal Employment Agency reports a five billion euro deficit. Labor costs could therefore continue to rise – they have already reached a fever pitch that is dangerous for the German economy.

For science fiction fans, 42 is the perfect number, the answer to the question of the meaning of life. For doctors, however, it is the threshold at which a fever becomes fatal for the patient. German economic policymakers are more likely to lean on doctors than on fantasy writers when it comes to interpreting the 42 percent figure. If non-wage labor costs reach the 42 percent mark, the competitiveness of the German economy is in mortal danger. They currently stand at 41.9 percent – and that's a nice calculation in several ways.

The increase in non-wage labor costs represents a delicate spiral that perpetuates and accelerates itself: If the economy is doing poorly, non-wage labor costs rise. If they rise, the economy fares even worse. It was precisely at this point that the traffic light coalition ended its business, leaving the conservative-red coalition in a difficult position. Under Health Minister Karl Lauterbach (SPD), contributions for health and long-term care insurance exploded. This trend is far from over. The Ministers of Economic Affairs and Labor, Robert Habeck (Greens) and Hubertus Heil (SPD), have worked together to ensure that pension and unemployment insurance contributions could soon increase.

According to Politico, the head of the Federal Employment Agency, Andrea Nahles (SPD), has written an urgent letter to the new federal government. According to the report, the agency had already used up €2.8 billion of its €3.2 billion reserve as of April. Overall, the deficit could rise to over €5 billion this year. The reserve would then be depleted, and the government would have to bail out the agency – through subsidies or by increasing the contribution rate, which is currently 2.6 percent.

There are several reasons for the Federal Employment Agency's deficit. They can all be traced back to Robert Habeck. Firstly, due to the Green media darling's misguided policies: High energy costs and sprawling administrative structures are choking the economy, causing it to shrink for the third year in a row. Accordingly, unemployment is constantly rising, despite a supposed "labor shortage." Secondly, the Federal Employment Agency is legally obligated to use the Ministry of Economics' growth forecasts as a basis when calculating its budget.

But Habeck's forecasts had more the quality of children's fairy tales than of reliable expert opinions. It's quite possible that, against his better judgment, he promised imaginary growth to improve his own image. In Robert Habeck's case, however, it would be negligent to prematurely rule out his absolute incompetence as the cause.

The end result is an expected deficit for the Federal Employment Agency of five billion euros this year – and a deficit of approximately twelve billion euros over the next four years. It should be noted that this deficit is only caused by the rising costs of unemployment benefits and their associated costs. The increasing use of the citizen's allowance – Hubertus Heil's political legacy – is at the expense of the federal government and local authorities. Last year, cities and municipalities reported a quadrupling of their deficits from around six to 24 billion euros.

Overall, non-wage labor costs are currently officially at 41.9 percent. This is just shy of the fever mark. Helmut Kohl (CDU) was voted out of office in 1998 because these costs had skyrocketed from 39.3 to 42.1 percent within three years by the end of his term. Gerd Schröder (SPD) introduced the unpopular Hartz laws, which were so devastating to his career, under pressure because, after a brief, slight recovery, costs had risen back to 42.0 percent – the fever mark of the German economy.

Under Angela Merkel (CDU), non-wage labor costs declined significantly. In the years immediately before and after the banking crisis, they were at 39.5 and 39.6 percent, respectively. After 2015 and due to the pandemic, they rose slightly. Under the chancellorship of Olaf Scholz (SPD), they rose from 40.0 to 41.9 percent. Merkel's ability to reduce costs was primarily due to unemployment insurance and her predecessor, Schröder: As a result of the Hartz reform, the German labor market recovered, a job boom began, and insurance costs fell from 6.5 percent in the previous year to now 2.6 percent.

Even under Merkel, health insurance costs were rising steadily – but slowly. Under Scholz and Lauterbach, they exploded: In the 27 years from 1995 to 2022, health insurance contributions rose from 13.2 to 15.9 percent – a rise of 2.7 percentage points. In Karl L's three years in office alone, they rose by a further 1.4 percentage points to the current 17.1 percent. But even that is an exaggeration. As minister, the "absolute killer variant" of economic efficiency forced the health insurance funds to reduce reserves and take on debt. Otherwise, the balance sheet would be even more disastrous. The situation of the health insurance funds under Lauterbach has become explosive for the successor government.

The umbrella organization of health insurance funds, the GKV, has already announced that the funds continue to incur massive deficits. Despite the 0.8 percentage point jump in contributions at the turn of the year, the situation is so dramatic that the umbrella organization is calling for a spending moratorium. Under Lauterbach and his predecessor, Jens Spahn (CDU), the Ministry of Health imposed additional and higher spending on health insurance funds, from which the pharmaceutical industry in particular benefited – such spending must now be reviewed, the GKV demands. Furthermore, the federal government should finally reimburse the health insurance funds for the full costs of treating recipients of transfer payments, essentially citizen's income. Currently, the federal government is shirking its burden by ten billion euros annually in this way, which ends up being borne by the health insurance funds. That is, by companies and their employees, who each pay half of almost all non-wage labor costs, such as health insurance contributions.

Even if the set figure of 41.9 percent is accepted without question, this level is an unreasonable burden on companies and their employees. High non-wage labor costs are squeezing companies' throats. They are a key reason why the German economy is shrinking for the third year in a row. They are sapping employees' motivation to work. Because contributions keep rising, the wage gap is getting smaller and smaller compared to what the state pays recipients of the citizen's income with the money of those who work – for doing nothing. If you add in the costs incurred by participating in working life, it would already be financially sensible for many low- and middle-income workers, even selfishly speaking, to switch from the world of work to the citizen's income. Of course, every such transition is a social catastrophe.

In addition, especially for employees, the comparisons of total non-wage labor costs from 1995 to 2005 or 2025 are flawed. While they rose from 39.3 percent to 41.9 percent, the costs for the average consumer have risen even more significantly. For example, due to the reduction in pension levels under Gerd Schröder. Those insured must fill this gap on their own or face poverty in old age. Figures that do not appear in these statistics and in some cases cannot be calculated precisely.

Or statutory health insurance. Spahn and Lauterbach have been generous with contributors' money when the pharmaceutical industry has profited from it. But under these ministers, co-payments for insured persons have increased and benefits for insured persons have shrunk. Whether someone earns enough money can be seen in their mouth. In the quality of their dentures. While insured persons can offset the reduced benefits of statutory health insurance with private supplementary insurance – but these are costs that also don't appear in the statistics.

And the 41.9 percent figure still warrants further scrutiny. This ugly figure is still calculated in a way that makes sense. For example, it doesn't include the 0.6 percent surcharge that childless people pay on long-term care insurance. Some company health insurance funds also decided not to increase their contribution rates at the turn of the year – in order to be able to aggressively poach customers from other funds with contributions that are actually too low. But now, and in the near future, they have had to and will have to adjust the contributions to real circumstances, so that the dangerous fever mark of 42.0 percent of total non-wage labor costs has actually already been exceeded.

Even worse: The German economy's fever pitch doesn't stop at 41.9 percent: Because, in addition to health insurance costs, those for long-term care are also rising. Karl Lauterbach raised the general contribution rate first from 3.05 to 3.4 percent and then to 3.6 percent. Added to that are the additional benefits for those without children. Contributions have risen by around 20 percent in just three years. Karl Lauterbach has used his term in office in his own way. He has stated that long-term care insurance still doesn't have enough money - thats hte message he left to his successor, Nina Warken (CDU). He's probably right.

Unemployment insurance, as described, is generating a deficit of €5 billion. Either the federal government will cover it with taxes, or contributions will have to rise here as well. The new government has effectively already decided this for pensions. The CDU/CSU is enabling the SPD to fulfill its central election promise and keep pension levels artificially stable, despite a shrinking economy and an aging society. According to federal government figures, this will increase pension contributions from the current 18.6 percent to 22.3 percent over the next ten years.

3.3 additional percentage points for pensions and further increases in nursing care, health, and unemployment insurance. If the CDU/CSU government can't put a stop to this, the 42 percent increase in non-wage labor costs won't be a fever pitch, but a reminder of the good old days. If this trend continues unabated, even non-wage costs of 50 percent are possible.

In addition to the high tax level. Regarding "CO2 taxes." The high energy costs. The high administrative costs.

The German economy won't be able to handle this. It already can't. It's shrinking and shrinking and shrinking. This will cause non-wage labor costs to rise even more sharply, for example, due to lost pension insurance revenue or higher unemployment insurance costs.

The competitiveness of the German economy is in acute danger. Non-wage labor costs aren't really explosive for the new government. That would be understating the situation. They're a hybrid atomic and hydrogen bomb. The Friedrich Merz government must address this urgently – otherwise, its social security system will explode.

Finance Minister Lars Klingbeil (SPD) and Economics Minister Katherina Reiche (CDU) must act like doctors: First, they must reduce the fever, or the patient will die. That means they must quickly reduce non-wage labor costs or at least prevent a further increase. In the short term, this will only be possible with government subsidies. For example, in health insurance, by the federal government finally paying the ten billion euros annually that it has so far underpayed for recipients of the citizen's income tax. Or through direct aid for the employment agency.

But simply reducing the fever won't cure the patient. To this end, Klingbeil and Reiche must address the symptoms of the disease: not just promise to reduce bureaucracy, but actually do it. Massively reduce government spending, thereby enabling lower taxes and more breathing room for the economy. Eliminate incentives to not work through the citizen's income tax. And allow skilled workers to immigrate.

Real skilled workers, mind you. People who want and can work. Not, as has been the case so far, allowing just anyone to come to the country in the hope that there would be enough for the labor market. This mixture of ideological stubbornness, madness, and naivety has contributed to the fever of non-wage labor costs.

The governments of Angela Merkel and Olaf Scholz promised workers who would pay Germans' pensions – but they caused an increase in – among other things – the costs of health and unemployment insurance. So the German economy is now dangerously close to fever pitch.