Distribution of income in Germany in 1997

In a new report on the distribution of income in Germany in 1997, the Institute for Economics and Social Science examines current developments in earned income and profits, as well as the changes in the income of private households. The report verifies a trend which has been observed for some time towards a growing social polarisation in the distribution of income in Germany, for reasons which include structural changes in employment relationships and moderate collective bargaining policies.

The distribution of earned and household incomes (Arbeits- und Haushaltseinkommen) in Germany has been displaying growing "social polarisation" for some considerable time. This is the finding of a new report published by the Institute for Economics and Social Science (Wirtschafts- und Sozialwissenschaftliches Institut, WSI) - "Verteilungspolitik; Chronik eines angekündigten politischen Selbstmords", Claus Schäfer, in WSI-Mitteilungen Vol. 50, No.10 (1997). The reasons for this development range from structural changes in employment relationships to the implementation of moderate collective bargaining policies and active redistribution through state social and tax policies.

Increase in atypical employment

One of the essential causes for the growing social polarisation of earned income is to be found in the significant increase in "atypical" employment relationships. Some 20 years ago, 85% of employment contracts in western Germany were full time and liable to social insurance. Today, this proportion has dropped to 67% while 33% of contracts are more or less atypical. In addition, there are an estimated 5 million persons engaged in marginal part-time work (geringfügige Beschäftigung) who are not covered by the social security system. The latter group is only partly registered in the official labour market statistics and therefore the percentage of atypical employment contracts in Germany is actually higher. In any case, a growing tendency towards an increase in atypical employment and the consequent relative and absolute reduction of the associated earned income is being registered.

Increasing differentiation within full-time employment

Amongst those in full-time employment, a tendency towards a greater differentiation of individual levels of earned income can be observed (DE9702201F). Amongst the less well-paid this has partly taken on the nature of atypical employment. Accordingly, in 1975 there were 1.8 million so-called "working poor" amongst the full-time employed workforce in western Germany, whose income stood below 50% of average full-time earned income, accounting for 10.5% of all full-time employment. By 1990, this figure had risen to 2.2 million persons, or 11.7% ("Empirische Überraschung und politische Herausforderung: Niedriglöhne in Deutschland", Claus Schäfer, in "Einkommensentwicklung und Armut", Irene Becker und Richard Hauser (eds), Frankfurt/New York (1997)) .

Developments in collective bargaining

Collective bargaining policy in recent years has led to moderate wage and salary settlements. Average collectively agreed increases since 1994 have been consistently below increases in prices and productivity and have not exhausted the so-called "margin of distribution" (Verteilungsspielraum) (DE9709232N). In 1997, average collectively agreed increases remained below the rate of inflation.

Furthermore, current actual earned income has risen less than collective agreements allowed for, because many companies have compensated for a part of the collectively agreed increases by a reduction of "payments above contract wages" - the payments additional to collectively agreed rates made by many companies (see, for example, DE9802247F). In 1997, many trade unions, in negotiation with employers, made social concessions in return for full payment of wages in the event of sickness which, following legal changes, could otherwise have been reduced by the employer (DE9709131F).

On the whole, the German "gross wage ratio" (Bruttolohnquote) - ie wage earners' income as a proportion of total national income - has been steadily sinking and in 1997 reached the lowest recorded level in decades. An international comparison indicates a correspondingly slow rise in German unit labour costs.

Developments in income after tax and social deductions

After the deduction of tax and social security contributions, the development of average earned income is even more unfavourable - Table 1 below gives the details. In western Germany the burden of income tax and social contributions has reached a "historic" level, while in eastern Germany the corresponding burdens are growing, in part faster than the general adjustments being made to earned income in order to bring it up to west German levels.

* Gross income = 100%.

**Changes for western Germany - 1980-96; changes for east Germany - 1990-96.

Source: WSI report on distribution of income, 1997.

Developments in profit income

In contrast to earned income, the profit income (Gewinneinkommen) of companies and the self-employed has developed at an above-average rate over recent years. The mirror image of recent exceptionally low figures for the gross wage ratio are the current high figures for "gross profit ratio" (Bruttogewinnquote). Net profits have increased more sharply than market profits because tax allowances at various levels have been made for income from enterprises. There are individual branches of the economy and individual regions which are significantly below the average profit income levels but, according to the German Federal Bank (Deutsche Bundesbank), even within enterprises in eastern Germany the profit situation, and more importantly liquidity and company capital, have considerably improved.

Development of private household income

The varying developments of market income and, in addition, a parallel development in the distribution of the tax burden have been influencing total income distribution at household level to the advantage of self-employed households and to the detriment of almost all other households for years. Table 2 below shows the development of private household income from 1980 to 1996. Since 1980, the relative income position of self-employed households has improved considerably, most noticeably at the level of available income after deduction of tax and social contributions and after taking all public money transfers into account. In contrast, the relative position of employee households has, for the first time, sunk to below the average (100%) level. It is also notable that self-employed households today - in contrast to 1980 - are, on average, much less affected by state redistribution policy than all other working households. The former lose 17.4% of their gross household income through redistribution policy and consequently less than even civil servant households, although civil servants in Germany do not pay social insurance contributions.

* Average gross income of all German private households = 100%.

** Average disposable income (income after taxes, contributions to social security plus social transfer income) = 100%.

*** Taxes, contribution to social security and social transfers in relation to the gross earned income of the specific household group.

Source: WSI report on distribution of income, 1997.

Polarisation of the tax burden

The polarisation of the tax burden on private households has been responsible for the widely held impression in Germany that the economy suffers from very high taxes. In fact relatively high taxes in Germany are based on a relatively narrow taxation base, whereby taxes on economic profits are reduced by a variety of tax allowances. This is the reason why the amount of all direct taxes on profits in relation to the total amount of taxes has been going down in Germany for years. On the other hand, the contributions to the whole tax yield arising from the creation and use of earned income has been rising - see Table 3 below. The polarisation of household incomes and the distribution of the tax burden have resulted in a noticeable structural change in the demand potential of the domestic economy. It is, therefore, a direct reason for the weakness in domestic demand which has been observed in Germany over recent years - and for which the demand for German products abroad is no compensation.

* West Germany only.

Source: WSI Report on distribution of income, 1997.

Commentary

As one of its main findings, the WSI report on distribution of incomes verifies a trend towards growing polarisation in the distribution of income in Germany. Despite the depth and length of these distribution changes, the proposed mechanisms of economic policy have not come into effect - ie a flexibilisation of employment relationships, a wider spread of earned income amongst full-time employed people and a moderate wage policy have not produced the desired reduction in unemployment. The further hoped-for effect of more employment as a consequence of reduced tax burdens on enterprises has not taken place. It must even be feared that the policy which was aimed at putting these mechanisms in motion has produced disadvantages for the economy.

One disadvantage of the polarisation of income which has been felt for some years is the weakening of domestic demand and production for the domestic market, with the accompanying strain on the labour market. A further outstanding disadvantage is the weakening of the state's power to act as a result of the decreasing tax burden on the economy and the associated income problems. For this reason, the state has increasingly fewer means for making future provisions with regard to infrastructure - including education, science and research - which benefit the economy in the form of public assets like innovation, human capital and work productivity. In this way the location factors which previously secured the German export economy an excellent position in world trade are at stake. According to the WSI report, these German experiences, together with similar ones in other developed countries, are a reason to demand a revision of the previously widespread economic policy. (Claus Schäfer, Institute for Economics and Social Science (WSI))