* IAB says joblessness to fall, albeit at slower pace
* Says positive impact of labour reforms is weakening
* Urges not just more, but better, well-paid jobs
By Sarah Marsh
BERLIN, March 22 (Reuters) - German unemployment will fall for the third consecutive year in 2012 and the number of jobs will reach a fresh record high since reunification, the Federal Labour Office's research institute IAB said on Thursday.
But the pace of decline in the number of jobless will ease as the impact of past labour reforms designed to increase labour flexibility gradually subsides, and the IAB urged employers to create more well-paid jobs to help boost domestic demand.
"The labour market remains robust but cannot continue its steep upward trend," the IAB said in a report.
"We do not expect the economic weakness seen over the winter to have a serious impact on the labour market. Companies will have frequently kept workers, given already improving sentiment."
German unemployment held steady in February despite harsh winter weather, again resisting the labour market difficulties seen elsewhere in the euro zone, data showed last month.
"For 2012 we forecast unemployment to fall by 130,000 to 2.84 million," the IAB said, adding that the jobless rate would fall to 6.8 percent from 7.1 percent in 2011.
This is less than last year's drop of 260,000 as the impact of former chancellor Gerhard Schroeder's labour reforms weakens and economic growth slows.
The IAB forecast Europe's largest economy would grow just 1.1 percent in 2012 after expanding 3 percent in 2011.
Germany's export-driven economy recovered quickly from the 2008/09 financial crisis but shrank by 0.2 percent at the end of last year as the euro zone's debt troubles and a global slowdown took a toll on exports and private consumption.
Many economists expect output to remain stable in the first three months of 2012, thereby avoiding the two successive quarters of contraction that define a recession.
So far a solid job market has helped prop up consumer spending and consumer and business sentiment surveys are upbeat, while some institutes such as RWI have recently hiked their full year growth forecasts.
The IAB forecast a further rise in the numbers of people from countries mired in the euro zone debt crisis coming to Germany in the search for jobs.
This, along with a greater participation of older people in the workforce, will fuel a rise in the potential labour force by 40,000 people to a near record high of 44.95 million, it said.
The IAB said the number of people in jobs in Germany would rise by 450,000 on average to around 41.55 million, a fresh record since reunification in 1990.
The institute said the number of jobs subject to social insurance contributions would rise faster than other employment, which is positive news for Finance Minister Wolfgang Schaeuble whose budget plans are based on strong tax revenues.
However, it also noted that reforms promoting labour market flexibility had led to a "revolving door effect" in some sectors in recent years, with workers unable to find steady jobs, and urged employers to create more secure, long-term jobs.
"The positive trend in employment in the past few years was brought about to a great extent by wage moderation and labour market reforms," the IAB wrote.
"We should not focus on continuing these mechanisms to achieve more improvement on the labour market however. Real wages should rise more strongly once again, as we have seen recently."
"The development of employment and income will play an important role strengthening domestic demand," the IAB said.
Years of restrained pay growth has boosted Germany's competitiveness and helped to cut its unemployment rate to a two-decade low. Many economists expect bigger wage increases in 2012 than last year and say they may outpace inflation.
Wage rises in many other euro zone countries have been steeper than in Germany in recent years, stoking the economic divergence which has underpinned the debt crisis in the single currency area.
Overall, wages for some 9 million workers are up for negotiation in Germany this year. Verdi and IG Metall unions are both asking for 6.5 percent wage rises for some five million workers in total. (Reporting By Sarah Marsh, editing by Gareth Jones)