Lower tax and insurance for low-wage employees, Germany

About

Country: 
Germany
Target Groups: 
employers/purchasersworkers/suppliers

 

In the aftermath of the reform proposals presented by the Hartz Commission in 2002, new regulations for low-wage employment contracts took effect in April 2003. These new rules stipulated that employees with low-wage employment contracts earning up to €400 – so-called ‘Minijobs’ – were exempt from paying social security contributions. Employers’ contribution rates were also reduced. Special regulations were introduced to give preferential treatment to paid work in private households, a sector assumed to be characterised by a high level of undeclared work. As study results show, the new regulations are widely observed and have led to a decrease in undeclared work.

 

Background

The 2001 Law on part-time and temporary work (Teilzeit- und Befristungsgesetz, TzBfG (in German, 21Kb PDF) laid down the same statutory rights for both part-time and full-time workers (EWCO, 2005). In 2002, the commission on ‘Modern services in the labour market’ – the so-called Hartz Commission (see EIRO articles from 2002 and 2003 listed below) –presented a reform proposal for national labour market policy. As a result of this proposal, the German government altered the legal provisions covering so-called ‘marginal’ part-time employment relationships. Apart from creating further employment, these measures were also introduced to reduce the extent of undeclared work. The actors involved in the initiative include employers, employees, social insurance organisations and private householders.

Objectives

The Hartz Commission suggested introducing certain regulations to increase employment in the low-wage sector, as well as to reduce the incentives to work illegally or engage in undeclared work. Among other aims, the reform focused on formalising paid work in private households, which was assumed – as in the construction sector – to represent a large proportion of the undeclared work in Germany.

Specific measures

Generally speaking, the new legislation raised the earnings threshold above which employees in low-wage jobs – Mini-Midijobs (in German, 417Kb PDF) – must pay tax and social security contributions from €325 to €400 a month. Furthermore, employees holding a Minijob do not have to make contributions to the statutory unemployment, health and pension insurance schemes out of their earnings. Employers, on the other hand, pay a fixed percentage of 30% of the wage to cover social security contributions. It should be noted that since 2003 people already in formal employment have been allowed to take up one parallel Minijob and receive the same preferential treatment.

Special regulations were also introduced covering low-wage jobs carried out in private households. First, the rate of social security contributions to be paid by employers in such cases was set at 12% for Minijob contracts. Secondly, employers in this sector can set off some of these wage costs against their tax liability.

Evaluation and outcome

Achievement of objectives

Most studies concerned with the introduction of Minijobs focus on the effectiveness of the measure as a means of creating employment. The small amount of research data available indicates that the introduction of the Minijob regulation did indeed reduce undeclared work, especially in the first two years after its introduction (see ‘Impact indicators’).

Obstacles and problems

The rate of social security contributions paid by employers was raised from 25% to 30% in 2006, thereby reducing the incentives for employers to contract employees on a Minijob basis.

Lessons learnt

Initial studies on the introduction of lower tax and social security for low-wage employees earning no more than €400 a month (Minijobs) indicate a decrease in undeclared work. However, the overall positive results of the reform were to some extent jeopardised by raising the tax and social security contributions payable by employers (see ‘Impact indicators’).

Impact indicators

In 2007, Claudia Weinkopf and Bettina Hieming analysed the effect of certain labour market instruments on behalf of the Federal Ministry for Family Affairs, Senior Citizens, Women and Youth (Bundesministerium für Familie, Senioren, Frauen und Jugend, BMFSFJ). The study (in German, 385Kb PDF) focuses on the extent to which the existing public labour market measures promote the formalisation of paid work in private households – such as ironing, gardening or babysitting. In this context, the authors pointed out that the regulations concerning Minijobs are easy to understand and are therefore widely observed.

In his study ‘Reducing the shadow economy in Germany: A blessing or a curse?’ (190Kb PDF), Friedrich Schneider shows that the introduction of the Minijob regulations led to a decrease in illicit work in 2004 and 2005 worth about €9 billion. However, Mr Schneider argues that this trend came to a halt due to the increase in employers’ social security contributions from 25% to 30%, which took effect on 1 July 2006. Mr Schneider estimates that these changes in legislation led to an increase in undeclared work worth €2.5 billion to €3.5 billion in 2006 and 2007.

Transferability

The measure described was tailor-made for the German tax and, in particular, social security systems. The transferability of the measure to other European countries therefore greatly depends on their individual tax and social security systems.

Contact

Sandra Vogel, Cologne Institute for Economic Research (Institut der deutschen Wirtschaft Köln, IW Köln)

Bibliography

European Industrial Relations Observatory (EIRO), ‘Federal Employment Service to be reformed’, April 2002, available online at: /ef/observatories/eurwork/articles/undefined/federal-employment-service-to-be-reformed.

EIRO, ‘New law passed on temporary agency work’, December 2002, available online at: /ef/observatories/eurwork/articles/new-law-passed-on-temporary-agency-work.

EIRO, ‘New legislation promotes “minor jobs”’, March 2003, available online at: /ef/observatories/eurwork/articles/new-legislation-promotes-minor-jobs.

European Working Conditions Observatory (EWCO), ‘Experiences with law on part-time work’, 2005, available online at: /ef/observatories/eurwork/articles/working-conditions/experiences-with-law-on-part-time-work.

Federal Employment Agency (Bundesagentur für Arbeit), Mini- und Midi-Jobs in Deutschland [Mini- and Midijobs in Germany], Nuremberg, 2007.

Schneider, F., Reducing the shadow economy in Germany: A blessing or a curse?, Discussion Paper, Department of Economics, University of Linz, Linz, 2007, available online at: http://www.econ.jku.at/members/Schneider/files/publications/ShadEconTISCR.pdf.

Weinkopf, C. and Hieming, B., Instrumente der Arbeitsmarktpolitik und haushaltsnahe Dienstleistungen [Labour market instruments and services in private households], Published on behalf of the Federal Minister for Family Affairs, Senior Citizens, Women and Youth, Gelsenkirchen, 2007, available online at: http://www.bmfsfj.de/bmfsfj/generator/RedaktionBMFSFJ/Abteilung2/Pdf-Anlagen/instrumente-arbeitsmarktpolitik,property=pdf,bereich=,sprache=de,rwb=true.pdf.

Sandra Vogel, Cologne Institute for Economic Research (IW Köln)

 

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