New legislation promotes 'minor jobs'

In December 2002, the German government reached an accord with the opposition on labour market reform in the 'low-wage sector'. The measure is part of a package of laws designed to implement the proposals of the Hartz Commission, which aim to enhance the flexibility of the labour market and to increase employment opportunities and incentives to work. With effect from April 2003, the reform will raise the monthly pay threshold up to which workers with a 'minor job' have to pay no social security contributions from the current EUR 325 to EUR 400 per month, as well as cutting contributions on pay between EUR 400 and EUR 800. The government hopes that the changes will create at least 320,000 new jobs, which could balance out the expected initial revenue loss of about EUR 1.6 billion.

On 17 December 2002, the mediation committee of the lower house of the German parliament (Bundestag) - where the governing coalition of the Social Democratic Party (Sozialdemokratische Partei Deutschlands, SPD) and Alliance 90/The Greens (Bündnis 90/Die Grünen) holds a majority - and parliament’s upper house (Bundesrat) - which is controlled by the Christian Democratic Party (Christlich Demokratische Union, CDU) and Christian Social Union (Christlich Soziale Union, CSU) opposition parties - agreed a compromise on a bill designed to reform employment in the 'low-wage sector'.

This bill is part of a package of proposed changes in the legal framework entitled 'Modern services on the labour market' (DE0212203N), which implements in part the proposals of the government-appointed Commission on Modern Service Delivery on the Labour Market (Kommission für moderne Dienstleistungen am Arbeitsmarkt) (DE0209205F) - the 'Hartz Commission'. The Commission, whose membership included representatives from industry and trade unions, delivered its final report in August 2002.

Compromise reached

The Hartz Commission's remit was to develop proposals for reforming labour law and job placement services, as well as improving the efficiency of labour market policy tools. It suggested, among other measures, that 'minor jobs' (Minijobs) should be encouraged in order to increase employment in the low-wage sector as well as to reduce the incentives to work illegally. One of the Hartz Commission’s proposals was to increase the threshold for earnings from such small-scale minor jobs, below which social security contributions are not paid. An increase in this monthly earnings threshold from the current EUR 325 to EUR 500 was proposed. Furthermore, the full rate of social security contributions should not, it was recommended, apply immediately above this threshold - instead the full contribution rate would apply to earnings above EUR 1,000, with the rate increasing incrementally on earnings between EUR 500.01 and EUR 1,000. It was also proposed to simplify the payment procedure for social security contributions in respect of minor jobs, though only in the case of household-related services such as childcare, care for the elderly and domestic help. It was suggested that private households employing people to do such jobs should be allowed to deduct the cost from their income tax base.

After weeks of debate, the labour market reform package was approved by the Bundestag on 15 November 2002. However, some parts of the bill also required the approval of the upper house (Bundesrat). These were not passed until 17 December, when the government reached a deal with the opposition on the new legal framework for minor jobs. The accord between the government and the CDU/CSU opposition on all minor jobs paying less than EUR 400 per month - see below - was possible because the conservative opposition had already pledged to free such jobs from tax and social security contributions in its manifesto for the 2002 federal elections, which the opposition parties lost by a slim margin (DE0208204F). As with the Hartz Commission, the opposition believes that employment in the low-wage sector is hampered by high taxes and social security charges. This shared belief enabled the parties to strike a compromise on the necessary changes to the legal framework governing the low-wage sector.

Key provisions of new legislation

From April 2003 onwards, the new legislation raises the earnings threshold above which employees must pay tax and social security contributions in respect of minor jobs from EUR 325 to EUR 400 per month. This preferential treatment also applies to people who have (only) one minor job in addition to their main job. Employers, however, must pay a fixed percentage (25%, up from the current 22%) of the amount paid to the employee up to this threshold in taxes and contributions to pensions and healthcare insurance. The payment procedure for these employers’ contributions and flat-rate tax has been simplified, and both of them now go to a single collection agency. Where the employee’s gross income is above EUR 400 per month, employers will have to pay the usual 21% of gross income in social security contributions.

Tax and social security contributions apply to earnings from minor jobs above EUR 400 a month. However, to avoid to steep an increase at this EUR 400 threshold, the full rate of employees' social security contributions applies only from EUR 800 upwards. Between EUR 400 and EUR 800 a month, the rate increases incrementally from 4% of pay until it reaches the normal rate of 21% at EUR 800. Table 1 below sets out the new rates of employee and employer contributions on earnings up to EUR 800 per month.

Table 1. Tax and social contributions for low-wage earners, in % of pay
. Employers’ contributions Employees’ contributions
Gross monthly income in EUR Pension insurance Healthcare insurance Unemployment insurance FFlat-rate tax Pension insurance Health insurance Unemployment insurance
Up to 400 12 11 0 2 0 0 0
400.01 9.75 8 3.25 0 4.1
500 9.75 8 3.25 0 10.8
600 9.75 8 3.25 0 15.3
700 9.75 8 3.25 0 18.5
800 9.75 8 3.25 0 9.75 8 3.25

Note: health insurance includes 0.85% nursing insurance contributions.

Source: Institut der deutschen Wirtschaft Köln, IWD No. 5/2003 (slightly revised).

Private households have to pay a flat-rate contribution of 12% to hire employees in minor jobs. Such expenses can - up to a fixed limit - be partly deducted from such private employers' income taxes.

Overall, it is hoped that the changes will improve the incentives to work in the low-wage sector, as the net earnings of the affected employees will be higher after 31 March 2003 than before. For example, people earning slightly above the EUR 400 threshold will find that their social security contributions are reduced by about EUR 68 under the new rules. This reduction in social contributions levied on labour decrease smoothly up to the point where monthly earnings reach EUR 800. For instance, someone who earns EUR 780 gross a month will save only EUR 4.51. Creating such minor jobs has also been made more attractive for employers, as the total cost to employers of hiring someone with a net income of EUR 400 is currently EUR 613 a month, due to employers' social security contributions. In future, the total cost will be EUR 500 a month; thus, the employer will save EUR 113 a month. The new regime provides cost advantages when compared with the current situation up to the point where monthly labour costs exceed about EUR 1,060. Table 2 below provides a comparison of employers' labour costs under the old and new regulations

Table 2. Employers’ total labour costs for low-wage earners
Employee's net monthly income in EUR Total monthly labour cost for employers in EUR
Old regulations New regulations
300 366 375
400 613 500
500 766 709
600 920 903
700 1,069 1,069

Note: calculation assumes total social security contributions of 41.7%

Source: Institut der deutschen Wirtschaft Köln, IWD No. 5/2003 (slightly revised).

Responses

Through the new legislation, Wolfgang Clement, the Minister for Economic Policy and Employment, aims to create more than 320,000 new jobs. The benefits of creating these jobs are seen as being greater than the loss of revenue resulting from the changes to the legislation on tax and social security contributions on minor jobs. These changes, it is estimated, will cost the government EUR 1.6 billion.

The president of the Confederation of German Employers’ Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA), Dieter Hundt, welcomed the new legislation as a step in the right direction, as it cuts 'red tape' and simplifies procedures for employing people in small part-time jobs. By contrast, representatives of the German Federation of Trade Unions (Deutscher Gewerkschaftsbund, DGB) and of the Unified Service Sector Union (Vereinte Dienstleistungsgewerkschaft, ver.di) suspect that these comparatively inexpensive minor jobs will prevent entrepreneurs from creating full-time jobs.

Critics also argue that the total effects of the new legislation on registered unemployment will be slight, as the additional employment is likely to emerge primarily from the 'hidden reserve' of labour. This could well be true, as recipients of unemployment aid or social assistance will be left with only a rather small portion of any supplementary income which they earn in a minor job. Finally, misuse of the new legislation is also possible because employees whose gross earnings are slightly above the EUR 400 monthly threshold can obtain full healthcare insurance coverage at the very low price of EUR 16.60 per month.

Commentary

On balance, the advantages of the new regulations outweigh the potential problems. Lower labour costs for employers will improve employment dynamics, and a higher net wage will, in all probability, reduce the amount of illegal work in the clandestine economy and, at the very least, increase employment emerging from the hidden reserve. It is also true, however, that the reform is only a small step towards improving the German labour market situation. The German labour market problem can be solved only through a consistent, long-term approach to combat the causes of unemployment. Such a strategy of fighting unemployment will have to make wages more downwardly flexible by, among other changes: making it easier for individual companies to opt out of collective agreements with the aid of opening clauses; easing Germany’s strict job-protection laws; limiting the ability of works councils to block or delay company plans; and changing the favourability principle (Günstigkeitsprinzip), which means that firms can deviate from collective agreements only by paying more. The latter reform would help to preserve jobs by enabling a dying firm to, for instance, reduce wages. However, none of these measures is likely to solve the German unemployment problem at the root unless welfare programmes are reformed at the same time, as these often provide strong disincentives against seeking gainful employment. Long-term unemployed and lower-skilled people should receive lower replacement incomes and be given in-work wage supplements instead. (Lothar Funk, Cologne Institute for Business Research, IW)

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