Wage incentives aim to boost employment of older workers

In mid July, the Federal Minister for Labour and Social Affairs proposed to raise the employment rate of older people by granting wage supplements for unemployed persons who accept a low-paid job and wage subsidies for companies that hire persons aged over 50 years. The proposal has met with mixed reactions from the unions and employer organisations.

On 19 July 2006, the Federal Minister for Labour and Social Affairs (Bundesarbeitsminister), Franz Müntefering, presented a government proposal on how raise the employment rate of older people. The so-called ‘50plus Initiative’ (in German) aims to facilitate the reintegration of older unemployed persons back into employment, and also to increase the incentives for companies to retain older employees at work. By 2010, the employment rate of people aged over 50 years should rise to at least 50%.

Background

The duration of unemployment benefits has been reduced in recent years. For example, for persons aged over 55 years, the maximum period for which benefits can be claimed has been restricted to 18 months. Moreover, opportunities to take early retirement have been curtailed for both unemployed and employed people. According to the latest OECD Employment Outlook, the labour force participation rates of older persons in Germany (52.1%) and the corresponding employment/population ratio (45.5%) were, in 2005, lower than the OECD average (54.2% and 51.8% respectively).

In addition, the participation rate and employment/population ratio of older people were clearly below those for persons aged between 25 and 54 years (86.4% and 77.4% respectively). The proportion of persons aged between 50 and 65 years among the working age population is, however, estimated to grow and is expected to level off at nearly 40% by 2020. Therefore, an ageing workforce coupled with an ageing population requires that a larger percentage of older people should be employed in the future. As a result, the task of reintegrating persons aged 55 years and older back into employment has become an important objective for the German government.

50plus Initiative

The ‘50plus Initiative’ presented by Minister Müntefering on 19 July focuses, in particular, on methods that will help to facilitate the reintegration of older unemployed persons back into employment. The initiative contains the following proposals:

• Recipients of unemployment benefits (Arbeitslosengeld I) who are still entitled to receive payments for at least a further 120 days are to obtain a wage supplement if they accept a new job that is paid at a significantly lower rate than the last job they held before becoming unemployed. This wage grant should compensate for the resulting difference in income between the two jobs. In the first year, it covers 50% of the difference in net wages and 30% of the difference in the second year. In addition, pension insurance contributions are to be paid at 90%. In this respect, the adverse impact of accepting a lower paid job on the level of future pension benefits can be reduced.

• Companies that hire employees aged over 50 years will receive an integration subsidy of between 20% and 40% of the wage, which may be granted for two years provided the employment relationship lasts for at least one year. Applications for the subsidy will be approved on a discretionary basis so that the financing of the programme can be controlled.

The grant and subsidy programmes are to take effect on 1 January 2007. Mr Müntefering hopes that, when both programmes come into full effect from 2008 onwards, each measure will help to encourage up to 50,000 people back to work.

The ‘50plus Initiative’ also comprises programmes that already exist and that aim to reintegrate older long-term unemployed people back into employment in 62 districts, and to raise the employability of older workers by financing continuous vocational training and by improving health and safety at work.

In addition, the regulation of temporary employment of people aged 50 years or more will be streamlined according to EU standards (DE0512104F).

Reaction of employers and trade unions

The President of the Confederation of German Employers’ Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA), Dieter Hundt, generally welcomed the initiative in the light of the current climate where employers have to rely more on older workers (BDA Press release, 19 July 2006 (in German, 24Kb PDF)). Nevertheless, he claimed that the period during which the wage grant can be received should be shortened and that employees themselves should invest more in continuous training instead of relying on public funds, such as the unemployment insurance scheme. In addition, Mr Hundt called upon the unions to abolish seniority rules in collective agreements to ease the recruitment of older workers.

Annelie Buntenbach, member of the board of the Confederation of German Trade Unions (Deutscher Gewerkschaftsbund, DGB), declared in a press release on 17 July 2006 (in German) that the most important objective should be to retain older workers in employment. She called for social security systems to be compensated by employers if they dismissed older workers ‘without a compelling reason’. Ms Buntenbach also stated that wage grants for older workers could be helpful in isolated cases, but they should not become a regularly used instrument to foster employment.

Oliver Stettes, Cologne Institute for Economic Research, IW Köln