Driving a wedge

Governments in rich countries are pushing up the cost of hiring despite possible alternatives for raising revenue not being in short supply.

In December 2025 Rainer Kirchdörfer, chairman of Germany’s Foundation for Family Businesses, published the Stiftung’s annual monitor, a survey of 1,700 family-owned firms run by the Ifo Institute. More than 80 per cent of respondents said their employees were “heavily” or “very heavily” burdened by taxes. Kirchdörfer’s verdict was more severe. He said that high labour taxes “paralyse both sides and rob them of the joy of achievement”. Four months later the Organisation for Economic Co-operation and Development (OECD), a club of mostly rich countries, published Taxing Wages 2026, and it became clearer why he was so cross.

The report, released on April 22, contained the worst numbers since 2016. Across the OECD’s 38 member states, the average tax wedge on a single worker earning the average wage reached 35.1 per cent of total labour costs in 2025. It rose in 24 countries and fell in only 11. Effective rates climbed across all eight household types the report examines, the first time that had happened since Covid-19 pandemic-era stimulus was unwound in 2022.

Belgium topped the rankings at 52.5 per cent. Germany sat on 49.3, France on 47.2, Austria on 47.1 and Italy on 45.8. Colombia at zero and Chile at 7.2 anchored the other end. For a Brussels factory owner paying an average-wage assembly worker, very nearly half of every euro spent ended up with the Belgian state rather than the employee.

Take-home pay did grow in most places. Real wages rose in 35 of the 38 OECD countries during 2025, and post-tax incomes climbed in 28. The wedge widened but so did pay. Employers, though, wrote cheques against gross labour cost rather than net. A Parisian software engineer who pocketed roughly 38,000 euros net in 2025 was still an 87,000 euros line on the company budget.

Employers in France paid social security contributions worth 26.7 per cent of total labour costs that year, the highest share in the OECD. In Austria, Belgium, Czechia, Estonia, Italy, Slovakia, Spain and Sweden, the employer share alone topped 20 per cent. The figure on a payslip understated the actual bill by something closer to half than a sliver.

The fine print

InvestRomania’s English-language investor materials of recent years led with the country’s flat 10 per cent income tax, tied with Bulgaria’s for the lowest in the European Union. HIPA, Hungary’s investment-promotion agency, did the same with its country’s 15 per cent flat rate. Neither agency spent much time on what employees lost above that line: in Romania, 25 per cent of gross pay in social security and pensions contributions, plus 10 per cent for health, taking the effective deduction to about 45 per cent. Hungarian employees lost 18.5 per cent to social security; their employers added a further 13 per cent in a ‘social tax’ of their own.

The OECD identified the source of the latest rise. In Belgium, Finland, Germany, Israel, Luxembourg, Türkiye and the United Kingdom, higher social security contributions (SSCs), rather than higher income tax, were the principal reason the wedge climbed for a one-earner couple with two children. In Austria, Chile and Slovenia, the driver was cuts to cash transfers.

Personal income tax and employer social security contributions together accounted for 60 per cent of the wedge in Hungary in 2025, against an OECD average of 77 per cent. Czechia, Slovakia, Lithuania and Greece all drew heavy revenue from flat-rate employee contributions earmarked for pensions and healthcare. Welfare systems across the OECD depended heavily on what came out of pay packets; only the labels on the line items differed.

A panel study published in 2022, covering 36 OECD economies, found that a one percentage point rise in the average tax wedge corresponded with a 0.33 percentage point fall in the employment rate. The marginal wedge (the bite taken out of any pay rise) already exceeded 55 per cent in five countries in 2025: Italy at 72.8 per cent, Belgium at 65 per cent, Austria at 58.3 per cent, France at 58.2 per cent and Luxembourg at 57.4 per cent. Italian employers raised wages largely for the benefit of the Italian treasury.

Volkswagen reached its Future Collective Agreement with IG Metall in December 2024 and confirmed in March 2026 that it would shed 50,000 German jobs by 2030. The carmaker put its labour-cost saving target at 1.5 billion euros a year, on top of a further 13.5 billion euros in other efficiencies. Hourly labour costs in the German automotive sector ran at 59 euros to 62 euros in 2025, the highest in the world, against 47 euros in France, 33 euros in Italy and 29 euros in Spain. The Ifo Institute’s monthly business climate index slumped to pandemic-era lows during the autumn of 2025; its president, Clemens Fuest, warned that Germany risked sliding into “perpetual stagnation”.

In October 2025 the Tax Foundation released its International Tax Competitiveness Index, which penalises countries with heavy non-standard payroll levies. Possible remedies are not in short supply. Shifting the tax base from labour towards consumption (value-added tax; VAT), property, carbon emissions or financial transactions has sat on the policy agenda for decades. Estonia funded a recognisable welfare state on an employee SSC rate of 1.6 per cent in 2025, Ireland managed on 4.1 per cent. Whether French or Belgian voters would tolerate the trade-off is a different conversation altogether.

The OECD’s own statement in April was blunt: a higher tax wedge reduces incentives both to work and to hire. Kirchdörfer had said as much four months earlier in different words. Fuest’s stagnation warning gave the point economic weight, and Volkswagen put a number on it with another tranche of German job cuts. The OECD’s tables do not, in themselves, predict mass redundancies. They do suggest that, in country after country, the cost of putting someone on a payroll has crept up to a point where employers are reaching for alternatives.

Photo: Dreamstime.

Driving a wedge was originally published on Emerging Europe.

المصدر: Emerging Europe