Aktuelles Stichwort: "Kombilohn" Interview with Hans-Werner Sinn (in German) 18.10.2010 Media Library of the CESifo Group
The term “combi-wage” (short for combination wage) connotes the upgrade of low labour income by government transfer payments. Such a supplement to wages is the core idea of various social policy concepts.
In Germany and many other industrial countries low-skilled workers are particularly prone to unemployment. The reason: Low productivity jobs are either replaced by automation or reallocated to countries with lower wage levels. Downward adjustment of wages could counteract this development. Wage cuts are problematic in terms of social policy, however, as wage income no longer suffices to cover the concerned workers’ cost of living. In order to protect the workers, many industrial countries introduced minimum wages or government wage replacement benefits (unemployment benefits) that in fact work like minimum wages. However, these measures result in permanent job losses as jobs, whose productivity is lower than the minimum wage, are no longer profitable.
The combi-wage offers an alternative solution. It reduces the wage costs of low-skilled workers for the firms and thus helps create or maintain jobs in a low-wage sector without leading to income losses for the low skilled.
Two kinds of combi-wages may be distinguished. In one the supplement is paid to the firms. This has the consequence of wage costs declining without wages having to fall. In the other the supplement is paid to the individual workers making them accept lower wages as they don’t suffer any income loss. Both varieties have identical economic effects if the same supplements are paid for the same jobs. Therefore it almost makes no difference which variety is chosen. Most recommendations made by economists belong to the second variety, however. It has the advantage that the wage supplement can be adjusted more easily to individual conditions, similar to the income tax. That is why it is frequently called a negative income tax.
In its May 2002 paper on Activating Social Assistance, the Ifo Institute suggested a combi-wage model[1], whose essential aspects were adopted by the Scientific Advisory Council attached to the Federal Ministry of Economics (August 2002)[2] and by the German Council of Economic Experts (October 2002)[3] and that also influenced the Hartz Commission (August 2002)[4]. It was later marginally modified and includes four core elements:
The Scientific Advisory Council attached to the Economics Ministry and the Council of Economic Experts demand a somewhat different design of the additional earnings possibilities and in part a smaller cut of Unemployment Compensation II if work is refused, because they did not adopt the workfare approach.
The latter, in turn, is the central element of a proposal made by the Institute for the Future of Work (IZA), which, however, misses the element of loan employment. Those who refuse community work will not receive any assistance in this model.[5]
The economist Peter Bofinger argues for generous supplements to the employee contributions to social insurance.[6]
The economists Ronnie Schöb and Joachim Weimann argue for a combi-model in which the supplement is paid to the employers.[7] In addition, the employers are to be exempt from social security contributions for the lowest wage brackets. In order to prevent free-rider effects, this exemption is only to apply to contracts that are signed after a given date. In addition, for each additional job they create in the low-wage sector the firms are also refunded the social insurance contributions for another already employed worker. In this way the outsourcing of jobs is to be avoided.
Depending on the model, the income and employment effects will differ, as will the fiscal costs.[8]
With the introduction of Hartz-IV (Unemployment Benefit II) in 2004, combi-wage elements were introduced in Germany for the first time. At the end of 2005 there were about 1 million employees, who received the supplemental Unemployment Benefit II in addition to their labour income. In 2009 the recipients numbered 1.5 million. The public calls them “supplementers“, which is the wrong term, however, as it suggests that low wages are supplemented up to the Hartz IV base level. In truth, the wage supplements are paid way above the Hartz IV base level. At the same time, one-euro jobs were created in limited numbers that are similar to workfare. Both elements are a weaker form of the Ifo proposals 1) und 2). Experts recommend a further improvement of the additional earnings possibilities of recipients of Unemployment Benefit II.
A frequent criticism of the combi-wage is that it would lead to wage dumping, to free riding and to crowding out of existing jobs by subsidised employment (revolving door effect). This criticism applies only in part. Thus, the wage level will not fall without limit even without effective wage floors. Rather, an equilibrium wage will be established at which labour supply approaches labour demand. If the wage were to continue falling temporarily, employers would want to hire more workers than are available and compete up the wage.
Reducing wage costs to the equilibrium level is necessary in order to return to full employment as it existed in Germany until 1970. The combi-wage prevents also a fall in incomes to achieve this.
It is correct that there will be revolving-door and free-riding effects. If the wage level falls for newly hired employees, wages of already employed workers will also have to fall in the medium term. Otherwise the employers would be induced to replace the old workforce by the new employees. In the Ifo model and the models of the Council of Experts and the Advisory Council the concerned employees would be protected from the negative consequences, however, because combi-wage payments would automatically offset the wage reductions.
In times of globalisation with sharp international low-wage competition for simple work, the welfare state faces a challenge. It has the choice between wage replacement benefits and wage supplements. Wage replacement benefits create a wage floor and drive a substantial part of those to be protected into unemployment. That was the German way up to Agenda 2010. Germany had become the world champion of unemployment of the low skilled. Its unemployment threatened to pull down the entire country. This trend was only interrupted by the partial change from wage replacement (abolition of unemployment assistance) to wage supplement (additional earnings possibilities for Hartz IV recipients), introduced by Agenda 2010. An expansion of this successful way would further reduce unemployment in Germany.
[1] Sinn, H.-W, C. Holzner, W. Meister, W. Ochel and M. Werding, "Aktivierende Sozialhilfe, ein Weg zu mehr Beschäftigung und Wachstum", ifo Schnelldienst 55 (9), 2002, pp. 1 – 52. [2] Wissenschaftlicher Beirat beim Bundesministerium für Wirtschaft und Technologie, Reform des Sozialstaats für mehr Beschäftigung im Bereich gering qualifizierter Arbeit, 2002, BMWi Dokumentation 512. [3] Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, Zwanzig Punkte für Beschäftigung und Wachstum (Jahresgutachten 2002/03), Wiesbaden 2002 (especially text numbers 432–482). [4] Kommission "Moderne Dienstleistungen am Arbeitsmarkt" (Hartz-Kommission), Moderne Dienstleistungen am Arbeitsmarkt (Endbericht), BMWA, Berlin 2002. [5] Bonin, H. and H. Schneider, "Workfare: Eine wirksame Alternative zum Kombilohn", IZA Discussion Paper No. 2399, 2006. [6] Bofinger, P., M. Dietz, S. Genders, and U. Walwei, Vorrang für das reguläre Arbeitsverhältnis: Ein Konzept für existenzsichernde Beschäftigung im Niedriglohnbereich, Gutachten für das Sächsische Ministerium für Wirtschaft und Arbeit (SWMA), 2006, op.cit. [7] Schöb, R. and J. Weimann, "Kombilohn: Die Magdeburger Alternative", Perspektiven der Wirtschaftspolitik 1, 2003, pp. 1–16. [8] Sinn, H.-W, W. Meister, W. Ochel and M. Werding, "Reformkonzepte zur Erhöhung der Beschäftigung im Niedriglohnbereich: Ein Überblick", ifo Schnelldienst 60 (4), 2007, pp. 3-20.
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