After the Ifo Institute introduced its study on Activating Social Welfare in May 2002, a discussion was launched in Germany, which has constantly widened, on how a welfare-to-work policy could assist the low-wage sector. At the beginning of the discussion in 2002, reactions came from the Hartz Commission, the Academic Advisory Council of the Federal Ministry of Economics and Technology, and the German Council of Economic Advisors. The Magdeburg alternative was developed; attention has returned to the old concepts of a negative income tax or guaranteed minimum income (which had been discussed in the 1990s especially by sociologists); the IZA proposed a general work obligation for social welfare recipients (workfare); and economists in Kiel presented the idea of a hiring voucher. In this issue of ifo Schnelldienst an attempt is made to order the variety of proposals that have been presented.
The relevant authors of these proposals were asked to present their ideas in brief form for this ifo Schnelldienst. The contributors are:
The alternative reform concepts for increasing employment in the low-wage sector display a number of common characteristics: They assume that unemployment is mainly caused by structural and not by cyclical factors. Unemployment can be reduced by lowering labour costs or by achieving larger wage differentials. Their aim is more employment for lesser qualified workers in the primary labour market. They reject permanent employment in the secondary labour market (for example, in the form of job creation measures). They likewise reject a lowering of labour costs by way of decreases in the real income of those affected and want to assist them to find standard, full-time employment.
In addition to these basic common characteristics, the models also display considerable differences, however. These are found in particular with regard to the instruments with which the reintegration of the lesser skilled and long-term unemployed into the primary labour market is to occur. Fundamentally, a distinction can be made between a change in financial incentives and workfare approaches, whose common goal is to lower wage claims and in this way create more jobs.
In order to display these differences, an overview of the individual reform concepts was prepared. It shows the various income and incentive effects that the alternative models would have on the low-wage sector. For two household models - a single person and a family with two children under 14 years with one working member of the family - calculations were made for the various reform models in terms of what net income would ultimately remain, taking all transfers and taxes into consideration, at various amounts of gross wages. More precise and economically more correct than by using gross-net earnings curves, the stimulus effects of the different models can best be portrayed when the marginal burden of private value added is shown. This marginal burden measures how much the state receives from an additional unit of private value added by means of taxes and transfer reductions. This is the relevant factor from an economic viewpoint because it is ultimately unimportant for market dynamics, after a corresponding adaptation of wage rates, whether the burden of a tax or a transfer withdrawal lies with the employer or with the employee. What is important is the basis of assessment itself.
The economists and authors presented here have a common goal: through a considerable mobilisation of the labour market for the lesser qualified, to make Germany fit for the forces of increasing globalisation and international low-wage competition, without causing people to fall into poverty. Almost all models assume that it is better to reward labour market participation than to pay people for absenting themselves. The social objectives are also not neglected. The models that foresee cuts in standard government benefits for those who do not or will not work also propose the guarantee of municipal jobs and thus a full protection against a fall in the standard of living under the level of present unemployment assistance (Arbeitslosengeld II).
Hans-Werner Sinn
According to the Federal Statistical Office or the Institute of the German Economy (DIW), Germany still has the highest hourly wage costs for industrial workers among the major industrialised countries. Only smaller countries such as Denmark, Norway, Belgium or Luxembourg are similarly expensive, but their overall labour productivity is higher. The reason for the extreme German position is high gross wages and not non-wage labour costs. The proportional non-wage labour costs in Germany are considerably below the EU average. The high labour costs in Germany are also not justified by the supposedly superior productivity of the German economy. Germany has the highest labour costs in an international comparison for industrial workers in relation to the amount of its aggregate labour productivity (GDP per working age person). For this reason, despite favourable business activity the number of industrial jobs in Germany continues to decline.
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