German chancellor Gerhard Schröder's hard-won labour market reforms could weaken his country's generous but underfunded social security system and fail to reduce unemployment, Germany's six leading economic institutes said yesterday.

The warning, contained in the think-tank's semi-annual economic report, is the most severe criticism of the politically sensitive reforms yet levelled by economists.

It also comes at an awkward time for the government. Although acceptance of the reforms has risen, unemployment has continued to climb while massive job-cuts and corporate restructuring plans have mounted in recent weeks.

By dampening hopes of a swift turnaround in the labour market, the study could spark a new debate about the need for even more radical reforms.

In recent months, Mr Schröder has avoided seeking new changes, in an attempt to win public acceptance .

"Given the moderate [ economic] growth rate predicted by the majority of the institutes, a swift and durable improvement in the state of the labour market is highly unlikely," the report said.

Germany had the highest labour costs in the world after Norway, so one plank of the reforms - a subsidised labour market for low-paid, unqualified work - undoubtedly met the needs of companies keen to cut costs, the institutes said.

But there were signs that subsidised jobs - partly exempt from tax and social security contributions - were substituting full-time positions.

Germany had added 95,000 jobs in the seven months to July, but the total included 270,000 subsidised jobs, the institutes's report said. - (Financial Times Service)