March 1 (Bloomberg) -- German unemployment rose to a postwar record in February after the economy shrank in the previous quarter and Chancellor Gerhard Schroeder's changes to welfare rules led more people to register as unemployed.

The number of job seekers rose by 161,000 in February, adjusted for seasonal swings, the Nuremberg-based Federal Labor Agency said today. The adjusted unemployment rate rose to 11.7 percent, a seven-year high, while the unadjusted jobless total jumped to 5.22 million from 5.04 million in January.

The faltering economy, reductions in jobless benefits and tighter restrictions in eligibility for benefits that took effect in January contributed to a loss of support for Schroeder's Social Democratic Party in an election in the state of Schleswig-Holstein last month. The increase in unemployment has also dented the prospects of a recovery in consumer spending this year.

``Unemployment is the most important issue for voters by far,'' Matthias Jung, an analyst at opinion researcher FG Wahlen, said in an interview. ``The government's declining popularity is due to the fact that they haven't managed to convince voters they're capable of solving the problem.''

The next national elections are scheduled for 2006. The Christian Democratic Union, its Christian Social Union sister party and their Free Democratic Party ally would have a 7-point majority over the Social Democrats and their Green Party coalition partner if elections were held now, according to an FG Wahlen poll for ZDF television published Feb. 25.

`Depressing'

Economists expected the German unadjusted jobless total to increase 80,000, the median of 23 forecasts in a Bloomberg survey showed. The adjusted unemployment rate is higher than it has been since March 1998, when it was 11.5 percent. The record rate was set in October 1997 at 11.8 percent.

After the January unemployment report, which showed the unadjusted jobless count rising above 5 million for the first time since World War II, Schroeder said the figures were ``depressing.'' Economy and Labor Minister Wolfgang Clement said there are ``5 million reasons for labor-market reform.''

Germany's economy, Europe's biggest, shrank 0.2 percent in the fourth quarter from the third as companies bought less equipment, government spending fell and consumers held back on purchases. The BAG association of 5,000 retailers predicts that sales will decline for a fourth straight year in 2005.

The decline in gross domestic product at the end of 2004 may cause Schroeder's council of economic advisers to cut its forecast for growth this year. Germany's economy may expand no more than 1 percent, Bert Ruerup, the panel's chairman, said in an interview. The panel's November forecast was for 1.4 percent growth.

U.S. Growth

That contrasts with 3.6 percent growth economists expect the U.S. economy to generate this year, according to a Bloomberg survey. Gains in U.S. payrolls probably accelerated in February, with employers adding 225,000 workers, the median of economist forecasts showed before a government report on March 4.

German Labor Agency Vice-President Heinrich Alt last month said another 70,000 social-welfare recipients have yet to be included in the statistics, predicting that the jobless total has not yet peaked this year.

``People who hadn't registered as job seekers are now coming into the statistics,'' Hermann Ross, the agency's chief statistician, said in an interview. Under the new law, a married long-term unemployed person will only be eligible for full aid if the jobless spouse also registers, he said. That, combined with ``slow bureaucracy,'' is boosting the jobless count, he said.

Labor Costs

Even before the labor-market changes, German unemployment had risen for 11 months as companies moved jobs to countries with lower labor costs and stagnant domestic demand deterred hiring.

At 49,609 euros ($65,739), German annual employment costs are the highest in Europe, according to Deloitte & Touche LLP. A French job costs 43,990 euros and a job in the U.K. costs 41,875 euros, the company said. Employment costs are at 6,490 euros in Slovakia, 7,211 euros in Poland and 7,423 euros in Estonia, the three cheapest countries for employers, Deloitte said.

Miele & Cie KG, a 105-year-old maker of washer-dryers and vacuum cleaners based in Guetersloh, said Feb. 18 it will cut 1,077 jobs, or almost 10 percent of its domestic workforce by Sept. 30, to reduce costs. Munich-based HVB Group, Germany's second-largest bank by assets, last week said it will eliminate as many as 2,400 jobs, or 4 percent of its workforce.

Service companies are also firing German workers. Around 26,000 abattoir workers have lost their jobs in the past months as companies including Danish Crown AmbA commission companies that employ Poles, Czechs and Hungarians, the NGG labor union -- representing 236,000 workers in Germany's food, restaurant and hotel industries -- says on its website.

Working Longer

``There won't be any quick improvement in the labor market,'' said Ralph Wiechers, chief economist at the VDMA machinery industry group in Frankfurt, which represents 3,000 companies including Robert Bosch GmbH and ThyssenKrupp AG. ``There is tremendous pressure on companies and employees to adjust'' to cheaper competition from other countries, he said.

Rising unemployment is forcing people to work longer and accept pay cuts. The Ver.di public-sector labor union agreed to one-off payments over three years instead of regular pay increases and signed off on longer hours for workers including nurses and rubbish collectors in the western half of the country.

Germany isn't alone in the struggle to fight unemployment. The French jobless rate rose to a five-year high of 10 percent in January, measured by International Labor Organization standards.

The comparable German rate rose to 9.3 percent in January from 9.2 percent in December, the Federal Statistics Office said today. France and Germany, which account for half the $10 trillion euro region economy, have the highest jobless rates among the Group of Seven industrialized nations.

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net.

Last Updated: March 1, 2005 03:32 EST