Germany: New government sets out policies to create employment

The coalition government of social democrats and Christian democrats has issued its policy programme for its coming term of office. In the area of employment and social policy, the focus is on trying to generate employment. The government also intends to look at low pay issues, allow limited Sunday trading, raise the retirement age gradually to 67 and introduce further reforms to dismissal protection.

Background

Despite decades of prosperity and good economic growth, Germany has, in recent years, been suffering from a sluggish economy and severe problems linked to high unemployment. It is also harbouring a time bomb in the form of an ageing population, which will begin to put pressure on its social security and pension systems. Many of the problems that exist across the country are being experienced with particular intensity in the eastern regions, where unemployment can rise to more than twice the national average - the rate was 23.4% in Halle and 22.9% in Dessau in 2004, compared with a national average of 10.3%, according to Eurostat figures.

Against this less than rosy backdrop, the country's political parties fought a general election in September 2005. It was widely expected that the ruling social democratic party (SPD)/Green Party coalition government would not be returned to office and that the Christian democratic CDU and its Bavarian sister party, the CSU, would be the clear election winners. However, the result was less clear-cut, with the CDU/CSU faring worse than expected, and the SPD achieving a respectable result.

A period of confusion and talks followed, after which it emerged that a "grand coalition" government, between the CDU/CSU and SPD, would be possible. After further deliberations, it was agreed that the new government would be headed by the CDU leader Angela Merkel. The parties then entered into talks on a joint policy agreement for their term of office (Koalitionsvereinbarung). The coalition partners reached agreement on 11 November 2005 - the policy document is a hefty 191 pages, setting out policy detail in all areas. We review the new government's commitments in the areas of employment and social policy.

Labour market measures

The agreement contains a range of measures designed to promote employment creation and reduce unemployment. In particular, it is hoped that German unemployment rates can be brought nearer to the EU average - the latest figures from Eurostat, relating to August 2005, show that unemployment is running at 9.5% in Germany, compared with an EU average of 8.5%.

Cutting non-wage labour costs

The coalition parties make a commitment to reduce social security contribution payments to below 40% of pay on a long-term basis. Accordingly, the contribution to unemployment insurance funds will be cut from 1 January 2007 from 6.5% to 4.5%. One percentage point of this will be financed by efficiency gains and productivity increases at the Federal Employment Agency, with the other percentage point financed by an increase in VAT. In total, there will be a three percentage point increase in VAT (from 16% to 19% from 1 January 2007), of which one percentage point will finance the reduction in unemployment insurance contributions.

However, the contribution to state pension insurance will rise from 19.5% to 19.9%. Contributions to the state health insurance system will be reviewed during 2006, with the aim of keeping them the same or reducing them.

The top rate of income tax, for those earning more than €250,000 a year, will increase from 42% to 45%.

Helping young people

The parties aim to put into place a range of measures to help young people gain access to training opportunities and to the labour market. It is hoped that this will help reduce levels of unemployment among young people. The parties want no young person to be unemployed for longer than three months. Specific measures include:

• a continuation of the existing national agreement on training and development, under which all young people who are willing and able should be offered access to training or education. This will translate into the creation of 30,000 new training places. By pledging to continue this arrangement, the government stands by a decision that was made in June 2004 not to go ahead with legislation that would have forced companies not providing enough training places to pay a levy, in exchange for a commitment from employers to increase training places (EIRR 366 p.7). The government also invites trade unions to participate actively in the national agreement on training and development;
• the Federal Employment Agency will improve its advice and placement activities for young people. This will include targeted actions to help people gain access to vocational training, and help for young people with disabilities. Further, young unemployed people will be allocated a personal mentor. It is hoped that this one-to-one attention and help will enable young people to gain access to the labour market or training opportunities more quickly. Each mentor will be responsible for a maximum of 75 young people; and
• in keeping with the principle of "demand and promote" (fordern und fördern), coined under the labour market policy of the previous "red-green" coalition government of social democrats and greens, although young people will benefit from extra help and advice, they will be under an obligation to cooperate to try to find work, or face sanctions.

Helping older workers

All coalition parties are agreed that the employment situation of older workers needs to be improved. They state that measures should focus on employment, training and health policy and also attempt to remove incentives for workers to take early retirement. A particular focus should be on maintaining and improving the employability of older workers and helping them remain in or re-enter the labour market. This is also in keeping with the EU's Lisbon strategy, which sets a target of a 50% labour market participation rate for workers aged 55-64 by 2010.

The government intends to open a dialogue with trade union and business representatives on issues such as: training for older workers; the possibility of changing working time to suit people nearing the end of their career so as to ensure a smooth transition into retirement; modifying working conditions to suit older workers, in addition to maintaining and increasing their employability; and assessing all labour market measures to ensure that they are suitable for older workers.

Concretely, the existing measure under which the vocational training costs for older workers are paid for by the state will be extended for one year (this measure was due to expire at the end of 2005). Further, long-term working accounts will be given improved protection by means of a statutory framework. In addition, existing measures designed to encourage employers to recruit older workers will be extended for a further two years (these measures were also due to expire at the end of 2005).

The government intends to put specific measures into place for older people who have been unemployed on a long-term basis and who are finding it difficult to re-enter the labour market. For example, some 30,000 state subsidised employment opportunities will be made available to people aged 58 or above, on a three-year basis.

Finally, the government plans to change the Regulations governing fixed-term contracts for workers aged 52 and over. At present, employers recruiting workers of this age onto fixed-term contracts are not bound by normal restrictions in areas such as objective justification for the contract and time limits. This provision was brought before the European Court of Justice (ECJ) on the grounds that it contravenes EU equality legislation and legislation against age discrimination. The government states in its policy document that this provision will be altered so as to ensure that it complies with EU legislation, and that it will be made permanent - it was due to expire at the end of 2006.

However, the government's plans in this area may have to change, following the ECJ's ruling in this case, given on 22 November (Case C-144/04), that the German statutory provision allowing fixed-term contracts to be concluded with workers aged 52 or above, without any objective justification or time limit, contravenes EU legislation.

Migrant workers

The German government already has restrictions in place that apply to migrant workers from eight of the 10 new EU member states (the exceptions are Cyprus and Malta), as permitted by the EU. These restrictions are due to be reviewed in 2006, after two years of operation. The government states that it will extend the restrictions for a further three years, as allowed by the EU and also enter into dialogue with the commission on a further two-year extension. This would result in a total of seven years of restrictions on migrant workers from the new EU member states, which is the maximum length of time permitted by the EU.

Measures against illegal work and the informal economy

The government stresses its commitment to repress the informal economy, using a range of measures. Financial checks and controls will be strengthened and the government also intends to continue its dialogue with the new EU member states on how to solve any problems and differences of opinion. The aim is to increase cross-border cooperation between the relevant authorities. The government also wants to strengthen cooperation between the federal and regional German authorities.

In particular, it highlights a pilot project in the Berlin-Brandenburg region, under which employees in the construction, taxi and restaurant sectors wear visible identification to show that they are legal workers. The government will examine the results of this project and may consider extending it nationally.

Seasonal workers

The government intends to modify and extend current provisions governing foreign seasonal workers - the provisions were set to expire at the end of 2005. However, it also states that, given the continuing high levels of unemployment in Germany, it wants to encourage German unemployed workers to take short-term seasonal work. It therefore hopes to reduce the number of seasonal workers coming from central and eastern Europe and replace them with German workers.

It also looks at the issue of social security, noting that workers from the new EU member states are subject to the social security laws of their own member state. It comments that current procedures for transferring social security contributions from German employers to the relevant social security funds in other member states are bureaucratic and hopes to simplify matters.

Wages for low-skilled workers

The government estimates that almost 2 million people, or 39% of the number of unemployed people in Germany, have low skills levels or have no vocational qualifications. This means that they find it difficult to enter the labour market and therefore need better access, possibly combining training with some form of employment activity in the lower-paid end of the labour market. At present, the income of such people is supplemented by a range of state payments. However, the government believes that the present system is too complicated and wants to simplify it. The coalition partners state that they want to create a balance between not forcing wages down below acceptable levels, but allowing people more scope to work in activities that may be low-paid.

They will therefore look at the possibility of introducing a so-called combined wage model (Kombi-Lohn-Modell), which would combine or supplement a low wage with state social benefits, in order to ensure that the person in the low-wage activity has a decent overall income. The government argues that this could create new jobs, although the parties stress that they do not want to subsidise companies by means of long-term help with their wage costs, nor do they want to create a two-tier labour market.

The model that the government has in mind is to combine existing measures (such as supplements to unemployment benefits and child benefit payments) into one system. It will create a working party to look at this issue, which will also consider the interface with the tax system, the operation of mini-jobs, which are subject to special social security and tax arrangements, the posted workers' legislation, the debate on the minimum wage, which has been raging in recent months, and the possible influence of the EU services draft Directive.

The government intends to put forward proposals in this area during the course of 2006, based on the recommendations of this working party. It also intends to work with the social partners to find ways of regulating the low-pay sector in such a way that is transparent and appropriate to market conditions.

Active labour market measures

There is already a range of active labour market measures in place to try to stimulate employment creation. The government states that the range currently on offer is too large and confusing for people. It therefore intends to review all measures and abolish the ones that are found to be inefficient. The review process will be carried out before the end of 2006 and it is hoped that a reformed labour market policy will be formulated in 2007. It will also change a number of measures straight away. For example, the number of personnel service agencies, introduced under the labour market reforms that came into force in 2003 (Germany: Reforms to boost labour market) will be reduced - only those that have a successful track record will receive further financing from the Federal Employment Agency. There has been much controversy about the introduction of these agencies, with private placement agencies fearing that they would lose business as a result of these government-sponsored agencies. Further, it would appear that the personnel service agencies have not had as much success in placing people in employment as had been originally hoped.

The current "me-plc" provisions (Ich-AG), under which individuals can apply for state financial help to set up as entrepreneurs, will be extended until 30 June 2006. After this date, a new measure will be introduced. The me-plc measure has also been controversial - some commentators have criticised the high level of business failures among those who have gained this status, maintaining that applications have been approved without proper business plans (EIRR 374 p.8). The application criteria were tightened from 1 November 2004 (EIRR 369 p.8).

Unemployment benefits

The most recent labour market reforms - known as Hartz IV (EIRR 373 p.26) - introduced a new benefit system from 1 January 2005. The previous earnings-related long-term benefit was replaced by a flat rate secondary unemployment benefit payment (Arbeitslosengeld II), causing much opposition from trade unions and the public in general (EIRR 368 p.7).

The government stands by this reform, but will introduce some changes, aimed at cutting costs for the state. For example, the income of the parents of young unemployed people up to the age of 25 will in future be included in the means testing for this benefit. Further, the contribution to the national pension insurance fund for those receiving this benefit will be cut, from €78 to €40 a month, which will in the longer term result in lower pensions for people who have been unemployed on a long-term basis.

However, the government will harmonise the level of the benefit across the country, resulting in a €14 a month increase in benefit for a single person in the east (the current rate is €345 a month in the west and €331 a month in the east).

Changes to labour market legislation

Protection against dismissal

This is an area that has been the subject of much debate and has undergone reform within the past few years. The government essentially wants to relax the provisions governing protection against dismissal on the one hand, while tightening the regulation of fixed-term contracts on the other hand.

Accordingly, the government will abolish the current provision under which employment contracts can be concluded for a fixed term of up to 24 months, without any express reason. At the same time, however, employers will be able to extend the "waiting period" (Wartezeit), during which notice can be given without reason, from six to 24 months if they wish. This will also apply to new recruits hired at least six months after the expiry of a previous employment contract.

After this 24-month period, the range of normal dismissal protection provisions will apply, such as protecting employees on a range of socially related grounds and involving the works council. This waiting period differs from the probationary period (which can be a maximum of six months) in that during the probationary period, a notice period of two weeks can be given. The usual notice period is at least four weeks.

The government believes that this will simplify current procedures and reduce the number of legal challenges to dismissals. It also believes that this will encourage employers to recruit workers on open-ended rather than fixed-term contracts.

Extension of the posted workers legislation

Germany has legislation in place to provide protection in terms of pay and working time to posted workers in the construction industry and some smaller related sectors. The government intends to widen the scope of this legislation slightly, extending it to the commercial cleaning sector, as the collective agreements in this sector have been declared to be generally binding (allgemeinverbindlich) - this is a prerequisite for the application of the legislation.

The government will also look at the possibility of applying the legislation to other sectors if it is proven that there is a need to do this and there is a generally binding collective agreement in place. The existing legislation governing the construction sector will not be changed.

Working time

The social partners originally had until 1 January 2006 to adapt their collective agreements on working time in the light of the recent European Court of Justice rulings on on-call working. This deadline has been extended for a further year.

Further, new legislation will set out that retail outlets will be able to open for up to a maximum of four Sundays a year. This will add clarity to a long-running debate on the issue of Sunday working (EIRR 367 p.8).

Company-level co-determination

There have been concerns on the part of the employer and business community that the present system is putting Germany's businesses at a disadvantage in terms of global competitiveness. Legislation governing co-determination dates back to 1976 (the co-determination Act), and stipulates that the supervisory board of companies of more than 2,000 employees must be made up of equal numbers of employee and employer representatives, although the employer chair has the casting vote.

A government working party, headed by Kurt Biedenkopf, is at present examining the issue of co-determination (EIRR 382 p.8) and will issue recommendations to the new government in autumn 2006. It will also take into account the employee involvement arrangements set out in the Directive on worker involvement that accompanies the EU's European Company Statute Regulation, which was implemented in Germany in 2004.

The government states that it will use the working party's recommendations to make any changes deemed necessary to the present system, so as to overhaul and modernise co-determination arrangements in Germany.

Bargaining autonomy

One of the proposals in the CDU/CSU election manifesto was the possibility of allowing company-level agreements to deviate from sectoral accords in a bid to create more flexibility. This was hotly debated at the time of the election and strongly resisted by trade unions, which feared a further erosion of sectoral bargaining and of trade union power. In the end, this will not be implemented. The policy agreement between the coalition parties states, in an annex, that the coalition parties recognise the importance of bargaining autonomy and that company-level agreements that aim to create and safeguard employment - so-called "alliance for jobs" agreements - are important in the context of the principle of bargaining autonomy. The parties promise to debate this issue further with the bargaining parties.

Raising the retirement age

There has been much debate about the possibility of raising the statutory retirement age from 65 to 67. The coalition agreement states that in 2007, legislation will be put into place to provide for a gradual increase in the retirement age from 65 to 67, beginning in 2012 and ending by 2035. However, the government gives the assurance that people who have made at least 45 years' worth of contributions into pension funds will be able to continue to retire at age 65 on a full pension.

A review of this process will take place at the beginning of the next decade, although commentators expect that it is unlikely that the increase in retirement age will not take place, given Germany's demographic situation.

Parental benefits

In 2007, the government will introduce a new earnings-related parental leave benefit for parents of new-born babies. The benefit will be paid for one year at a level of 67% of previous net income, up to a ceiling of €1,800 a month. Only one parent will be eligible for this benefit. The government hopes that this will make it easier for people to combine work and family life.

The next steps

The government's policy programme was approved on 14 November and Angela Merkel was formally elected by MPs and sworn in as Germany's new chancellor on 22 November. All eyes will be on the government over the coming months to see whether this coalition of social democrats and Christian democrats - the first "grand coalition" since the one that lasted for three years in the 1960s - can deliver consistent policy, govern smoothly and bring Germany out of the economic doldrums in which it has languished in recent years. Some commentators are predicting that, although the parties have managed to put together a joint policy programme, implementation and the establishment of a joint strategic direction will be harder to pull off for these traditional political opponents.

Pension reform - long overdue in many minds - has been tackled, although some commentators believe that the lead-in times are too long. Further labour market reforms and tweaks to the government's active labour market strategy will also be put into place, although many among the business community believe that more radical change is necessary if the government is to make a serious impact on unemployment levels. Changes will be made to the regulation of fixed-term contracts and dismissal protection and the issue of co-determination at company level will be examined. Finally, the issue of a statutory national minimum wage - one of the main social policy themes of the past two years - may be revived under the new government, depending on the outcome of the government working party.

The coming year will doubtless be an interesting one for those involved in German employment and social policy and those involved in collective bargaining. The next few months will see the opening of negotiations for the metalworking sector agreement, which is seen as the pattern-setting agreement for the whole of Germany, and will be the first to be bargained under the new coalition government.

Reactions to the government's policy programme The new government's policy document has received a mixed response from the social partners and other commentators. The parties that are not participating in the coalition government, such as the liberal, free-market Free Democratic Party (FDP) and the Green Party, have criticised the policy programme, stating that it will not solve Germany's ills. They have been particularly critical of what they term a "completely unnecessary" increase in VAT. Critics of this say that it is the largest single tax increase in German post-war history. Dieter Hundt, president of the confederation of German employers, BDA, stated that the policy agreement contains some good projects for reform, but also noted that there were some contradictions and questions left unanswered. The BDA has welcomed the government's goal of reducing social security contributions, but questions whether total contributions can really be kept under 40% of pay in the long term and doubts whether this can secure the long-term financial future of social security funds. Hundt also regrets that the government has not embarked upon a more wholesale reform of the labour market. Although the BDA welcomes the changes in dismissal protection, it believes that further reform in this area is needed. Trade unions have given the policy programme a mixed response. In general, they are not happy that reductions in social security contributions will be financed by savings in the operation of labour market policy. Michael Sommer, head of the Confederation of German Trade Unions, DGB, has welcomed certain aspects of the government's programme, but has criticised elements such as the planned increase in the retirement age and believes that more needs to be done to help people to find work. However, he also stated: "It could have been much worse. We as trade unions have achieved a great deal … we have engaged in discussions with the coalition partners over the past few weeks and have made some real gains." Jürgen Peters, head of the metalworking trade union IG Metall, has stated that the policy programme contains a range of positive elements, but that it will not stimulate economic growth in Germany: "It is better than we had feared, but is also less than we had wished." He is pleased that there have been no changes to collective bargaining autonomy, even though the issue of company-level job alliance agreements will be debated in the future. IG Metall's particular criticisms centre on the changes to protection against dismissal, the increase in VAT and the gradual increase in the retirement age to 67. In terms of the new dismissal protection provisions, various experts warn that this is unlikely to create more open-ended employment, as the government had wished. Further, they warn of a range of complications, such as possible discrimination claims against dismissals during the waiting period, which is not covered by the law on protection against dismissal. They also point to potential difficulties in recruiting trainees for a fixed term after their period of training has finished. Some believe that employers will no longer want to train more workers than they need and then give them all a chance to prove themselves subsequently on fixed-term contracts.

Key elements of the new government's policy programme A commitment to reduce social security contributions to below 40% of pay on a long-term basis. The contribution to unemployment insurance funds will be cut from 6.5% to 4.5% from 1 January 2007. The contribution to public pension insurance funds will increase from 19.5% to 19.9%. VAT will be increased from 16% to 19% from 1 January 2007. The unpopular Hartz IV Regulations will remain in place, although some cost-cutting changes will be introduced. The level of the benefit in the east will be brought up to levels in the west. The normal retirement age will be raised gradually from 65 to 67 between 2012 and 2035. A new earnings-related parental benefit will be introduced and paid for one year at 67% of previous net income. Labour market New measures that are designed to help unemployed young people find work, including increased access to training and improvements to state advice and placement services. Older workers will be encouraged to re-enter the labour market, or remain in work for longer, by a range of measures, to be agreed with the social partners. The government wants to extend current restrictions on migrant workers for a further five years, subject to approval from the EU. New controls and checks will be introduced to curb the informal economy. The government will set up a working group to look at the issue of pay for low-skilled workers. It is interested in a model that would combine or supplement low pay with state social benefits. The debate on a statutory national minimum wage will also be considered by the working group. Proposals will be issued in 2006, based on the working party's recommendations. Personnel service agencies will also be continued if they have a proven track record of success. The current "me-plc" provisions will be extended until 30 June 2006. Labour legislation Abolition of the provision under which fixed-term contracts may be concluded for up to 24 months without any objective justification. However, employers will, if they wish, be able to extend the waiting period during which notice can be given without reason, from six to 24 months. The posted workers' legislation will be extended to the commercial cleaning sector. The social partners have until 1 January 2007 to adapt collective agreements in the light of ECJ rulings on on-call working. Retail outlets will be able to open for up to four Sundays a year. The government may issue recommendations on company-level co-determination, depending on the recommendations of a government working party, which is due to report in autumn 2006. No changes will be made to the present collective bargaining system, although the issue will be discussed further by the social partners. Changes will be made to the Regulations, allowing fixed-term contracts for workers aged 52 and over to be concluded without objective reasons or time limits.