Federal government gives financial support for pilot projects on subsidising low wages

From summer 2000 the German federal government will be giving financial support to pilot projects in four federal states, providing wage subsidies for long-term unemployed people and those with a low level of qualifications. This puts into practice a decision of the tripartite national Alliance for Jobs. Two different models for subsidising low wages will be tried out, based on the recommendation of a group of social scientists. Although these new low-wage models are hotly contested within the trade unions, the DGB union confederation has expressed initial support for the pilot projects.

On 4 May 2000, representatives of trade unions and employer's associations within the national "Alliance for Jobs, Training and Competitiveness" (Bündnis für Arbeit, Ausbildung und Wettbewerbfähigkeit) and the Federal Chancellor's office agreed on the introduction in four federal states (Länder) of pilot projects on wage subsidies for long-term unemployed people and those with a low level of skills. This initiative put into practice a decision taken by the Alliance in December 1999 (DE0001232F). About 300,000 employees in selected areas are to participate in these projects, which are scheduled to begin from summer 2000. Until the end of 2002, new recruits can participate in the scheme for up to 18 months each. The federal government will give financial support to the pilot projects totalling DEM 60 million in 2000. Each federal state concerned will therefore receive about DEM 15 million and contribute 20% from its own funds. Since the duration of all pilot projects is three years, the government will have to discuss the level of the subsidies for the projects over the following two and a half years.


In December 1999, the Alliance for Jobs decided to subsidise the wages of long-term unemployed and low-skilled people. This decision followed a study by a group of social scientists assisting the Alliance, in particular related to the working group on "benchmarking", which seeks to bring experiences from other countries into the German debate in order to develop an advanced model. This group consists of four scientists from research institutes which are either related to the employer's associations or trade unions, or are independent. This group was instructed to find employment options for low-skilled workers who have problems finding jobs - one of the aims of the Alliance (DE9812286N).

Taking into consideration the experiences of other countries, the group states that it expects an increase in jobs for low-skilled workers mainly in the service sector, particularly in services with low productivity where the work is relatively simple. Consequently, firms should be offered better labour supply conditions to increase the number of jobs in this sector, and to speed up the structural shift from the industrial sector to the service sector. In the opinion of the benchmarking group, the demand for many services is dependent on price, otherwise the work involved is done by the potential customers themselves. It further argues that (high) wages for jobs in this sector and (low) productivity of the target group (low-skilled and long-term unemployed people) do not fit together. This analysis leads them to the conclusion that either wages have to be lowered or non-wage labour costs have to be subsidised.

Two models for a subsidised low-wage sector

Two different models, both involving subsidising non-wage labour costs, were examined in the working group's discussion. These were developed in the federal states of Saarland and Rhineland-Palatinate.

The core of the "Saar model" is the subsidy of both employers' and employees' contributions to non-wage labour costs by the government. The level of subsidy is determined by the hourly wage. For hourly wages of up to DEM 10, non-wage labour costs are fully paid by the state. For hourly wages of DEM 10 to DEM 18, the level of the subsidy goes down, and those earning DEM 18 or more receive no subsidies at all. While employers profit financially from this scheme, because the savings reduce labour costs for their employees, the employees do not receive more money but instead are given the equivalent value of the cut in their contributions in the form of "qualification vouchers", which are paid into a fund for qualification which is administered by the local labour office. The participating employees are entitled to training leading to qualifications.

The Rhineland-Palatine scheme, called the "Mainzer model" after the state capital of Mainz, subsidises only the employees' contribution to non-wage labour costs. The subsidy goes down as monthly income increases, with no subsidy being paid for those earning over DEM 1,575 per month (DEM 3,150 for married couples). In addition, the Mainzer model involves increasing state child allowance for low-income workers in order to address the common problem, whereby it is not worthwhile for the main wage earner of a family with children to take on a job which is badly paid. The subsidy tops up the child allowance (DEM 270 each per month for the first and second child) to the level of social security benefit in respect of children (up to DEM 486 monthly). Under this model, a family does not lose money if it receives income from work instead of social benefits.

Pilot projects in four states and social partners' reactions

The state government in Saarbruecken wants to test the Saar model in the whole federal state of Saarland. The state ministry of labour estimates that there will be 2,000 participants in the pilot project every year. The state government plans to finance the project with DEM 16 million, covering the whole term of the project. Amongst the east German states, Saxonia is testing the Saar model in the area of Chemnitz, which has a high level of unemployment. The Mainzer model will be tested in several areas in the north of Rhineland-Palatinate. In addition, the east German state of Brandenburg wants to try out this concept. The projects will be accompanied by advisory boards in each state and there will be also an scientific evaluation of the projects at the federal level. One problem seems to be the necessary cooperation between the regional labour offices and the social welfare offices, because of the existing regulations governing data protection which make it difficult to coordinate the data on clients. While the labour offices are responsible for the projects and involved as a federal institution paying the subsidies, the social welfare offices draw up lists of people who are on welfare and who could be recipients of assistance in the pilot projects. There is no legal right for clients to receive the subsidies.

The president of the Confederation of German Employers' Associations (Bundesvereinigung Deutscher Arbeitgeberverbände, BDA), Dieter Hundt, prefers the Mainzer model, arguing that the fact that the Saar model not only subsidises the employee but also the employer could lead to unjust effects, because employers might make use of the subsidies even if creating jobs was not genuinely dependent on extra financial aid. This might create higher costs and negatively influence competition. He argues that low wages could be a means of bringing more flexibility into the labour market and that subsidies should be paid only if the income of a person working for low wages is so low that it is below the subsistence minimum.

From the beginning of the debate on a "low-wage sector", a majority of individual trade unions have rejected the whole concept, fearing that this could have negative effects on the collective bargaining system. In particular, the five unions which are due to form a new merged Unified Service Sector Union (Vereinigte Dienstleistungsgewerkschaft, Ver.di) (DE9911225F), and which are mostly affected by this concept, strongly oppose the assumption that the service sector depends on lower productivity, and demand a political rethink. By contrast, the German Federation of Trade Unions (Deutscher Gewerkschaftsbund, DGB) doubts the necessity of a low-wage sector, but accepts the pilot projects as an attempt to evaluate the effects of subsidised jobs on the labour market. Therefore it welcomes the effort of the federal government to support low-skilled workers. The vice-president of DGB, Ursula Engelen-Kefer, stated that employment offices all over Germany could in future be subsidising low wages if the pilot projects have positive outcomes. She prefers the Saar model, which combines the subsidy with measures for qualification, which could enable the participants to achieve a better economic position. She stated that both models leave the bargaining system untouched.


The concept of a low-wage sector has a highly controversial dimension, because it is has raised fears not only about creating a "society of servants" (Dienstbotengesellschaft), but also about endangering the whole bargaining system and indirectly dividing the labour market into low-wage jobs and jobs which are paid on the basis of collectively agreed wages. In addition, it is not quite clear what kind of jobs will be subsidised. One has to take into consideration that there are already jobs which are badly paid and that these jobs are mainly done by women. The idea that services in general, and also personal services, do not require any skills does not take into consideration the fact that many jobs in this sector require vocational training. Furthermore, the criterion of productivity as a yardstick for setting the wage level is highly problematic in cases where the outcome of a working process cannot be calculated in terms of items produced, as in the service sector. It might be true that the pilot projects will prove successful and that particular measures can improve the employability of low-skilled workers and long-term unemployed people. Nevertheless it is doubtful if a strategy for a low-wage sector will be more successful than the existing job-creation measures which are coordinated by the Federal Labour Office. According to the Office's figures, the major obstacle for unemployed people looking for a job is their age, and a lack of qualifications is of secondary importance. Considering this, subsidies should rather be paid to firms employing older persons and participating in a new "qualification offensive" to increase the employability of those who are badly trained or low skilled. The major problem on the labour market is that there is a lack of jobs in general and that more highly educated employees are finding themselves compelled to take on jobs below their educational level, replacing employees with a lower level of education in some sectors. (Alexandra Scheele, Institute for Economic and Social Research, WSI)

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