Germany: Reforms to boost labour market

The main theme of these reforms is, as in many other western European countries, the idea that the relationship between the state placement service and its clients should be to "demand and sponsor" (fordern und fördern). We examine the provisions of the new legislation.

Early registration of pending unemployment

From 1 July 2003, it will be compulsory to register with the labour market authorities as seeking work as soon as employees know that they are to lose their job. The aim of this is to encourage both employer and employee to use the time between the issuing of notice and actual departure to find alternative work or to embark on training.

Those who do not register in a timely fashion will lose unemployment benefit - up to 30 days' benefit, depending on the individual case.

Personnel service agencies

The new legislation creates personnel service agencies (Personal-Service-Agenturen - PSAs), which will operate as independent business units but be attached to local labour offices of the BfA. Each local office will be obliged to set up at least one such agency, which will be created on the basis of a contract between the labour office and either an existing or a new temporary work agency.

These agencies will employ previously unemployed people and subsequently hire them out to user companies and organisations. It is hoped that what begins as a temporary placement with the user company may develop into a more permanent position.

The labour office and the temporary agency will decide between them on the kind of unemployed workers who will be offered help by the PSAs. Priority will be given to direct placement in what is termed the "primary labour market" - ie the normal labour market, which is not protected by government aid and intervention. Workers placed by these agencies will be offered an employment contract of not more than 12 months' duration. It is foreseen that time between placements will be spent in further training and retraining.

When this measure was first mooted by the Hartz commission, one of the main focuses of debate was the terms and conditions of workers placed by these new personnel service agencies. In that regard, it should be borne in mind that there is no minimum wage legislation in Germany. In order to find a solution that is acceptable to all, the social partners are currently negotiating a collective agreement governing terms and conditions for workers employed by the PSAs. Negotiations began in December 2002.

One principle which must be respected is that of equal treatment regarding all terms and conditions of employment, and especially wages, between temporary agency workers and user company workers. However, the legislation provides for two exceptions to this:

Temporary work legislation

In order to promote the use of temporary work and facilitate the operation of the new personnel service agencies, the current legislation governing temporary work (Arbeit nehmerüberlassungsgesetz) will be relaxed from 1 January 2004. This legislation governs the operation of existing temporary work agencies and will also cover the new PSAs.

This deregulation fulfils the wishes of the existing temporary work agencies, which have for some time been lobbying for more flexibility in the way they operate.

The government's thinking is essentially that if temporary work could be made more attractive, more people would consider working in this way, thus having a positive effect on unemployment figures. The main changes are as follows:

In order to give the social partners time to alter their collective agreements accordingly and to negotiate new collectively agreed provisions, the new statutory provisions will enter into force with one year's delay - on 1 January 2004. Collectively agreed provisions may come into force prior to the new legislation.

Vocational training

The government intends to improve the provision of vocational training by introducing a new system of training vouchers. Thus, from 1 January 2003, all workers deemed by the local employment office to be in need of training will receive a training voucher (Bildungsgutschein). The worker may then choose how to spend this training voucher from a list of approved trainers and training measures.

Half the time spent receiving benefit while participating in training measures will be taken into consideration during the next period of unemployment benefit entitlement.

Accepting job offers

In accordance with the commission's original proposals, the definition of what is deemed to be a suitable offer of work is changed. In future, unemployed people will be called upon to accept offers of work which involve a geographical move, unless they have family responsibilities. Similarly, unemployed people will be expected to accept a job which involves daily commuting to work during the first three months. The system governing mobility allowances will be simplified in order to increase geographical mobility in the labour market.

Stopping of unemployment benefit

Unemployment benefit can, as was previously the case, be stopped in certain circumstances, such as refusing to accept jobs on offer. The new law does, however, reverse the burden of proof (Umkehr der Beweislast), making the unemployed person, and not the employment office as was previously the case, responsible for proving that they had not acted in such a way as to incur a stop in benefit or that the claim for unemployment benefit was erroneous.

If the unemployed person refuses a first job offer, benefit will be stopped for three weeks. If a second offer is refused, benefit will be stopped for six weeks. In the case of further refusals, a 12-week stoppage will be introduced. Previously, benefit stoppages usually lasted for around 12 weeks.

Restructuring of unemployment benefit

The Hartz commission proposed a complete restructuring of the current unemployment benefit system. It essentially proposed the creation of new types of benefit. Preparations for integrating the current system, made up of unemployment benefit (Arbeitslosengeld), unemployment assistance (Arbeitslosenhilfe) and social benefit (Sozialhilfe) are now being carried out. Unemployment benefit will be maintained but unemployment assistance and social benefit for those who are able to work will be merged (Arbeitslosengeld II). Within the calculation of financial support, partners' income and savings will be taken into consideration.

Young workers

Labour market integration opportunities for young, socially disadvantaged people will be improved. So-called "learning units" will be offered to young people, out of which vocational training can be built up. These units may later be offset against a vocational course, thereby shortening it.

Older workers

Measures are being put into place which encourage older workers to remain in the labour market. Accordingly, workers over the age of 50 will receive a bonus payment if they accept employment that pays less than their previous job. This will be made up of a tax-free payment of 50% of the net pay difference between the previous job and the new job and pension payments relating to 90% of the pay used when calculating the previous entitlement to unemployment benefit.

Further, as planned by the commission, employers hiring a worker over the age of 55 will be exempt from their unemployment insurance payment of 3.25% for that worker.

Finally, to encourage fixed-term working among older workers, the age limit above which employers may conclude fixed-term contracts with employees without giving a specific reason for the contract and without being subject to a maximum duration has been lowered from 58 to 52 years for a trial period of four years.

Creating job centres

In order to modernise the BfA's service provision, all local offices of the BfA will be changed into so-called job centres. These will offer unemployed people access to consultancy, placement and integration services, in addition to state financial payments to secure living standards. This broader range of services was one of the key recommendations of the Hartz commission. It is hoped that this will help to focus the BfA's efforts on active labour market policy and away from mere administration of unemployment benefits.

"Me-plc" structures

In line with the Hartz commission recommendations, subsidies will be offered to those who wish to set up a "me-plc" (Ich-AG) structure, which is seen as the first step to full self-employment. This subsidy measure, which will run until the end of 2005, is offered to those who were previously receiving unemployment benefit or unemployment assistance, those who have been engaged in publicly subsidised job-creation measures (Arbeitsbeschaffungsmaßnahmen) or structural integration measures (Strukturanpassungsmaßnahmen) and who wish to set up their own independent activity.

The subsidy will be paid for a total of three years, in gradually decreasing amounts as long as earnings do not exceed €25,000 a year and the person does not take on any employees (with the exception of family members). Benefit will be structured as follows:

These amounts are broadly equivalent to 50%, 30% and 20% of average unemployment benefit paid in 2002. The payments are tax-free.

The government plans to draw up specific legislation in the near future governing areas such as the simplification of tax and accounting as applicable to such small businesses.

Low-paid work

People earning less than €400 a month will be exempt from tax and pay social security at a rate of 10%. The ceiling previously stood at €325. Employers pay social security at a rate of 25% for these workers, made up of 12% in pension insurance, 11% in sickness insurance and 2% as a lump-sum payment (Lohnsteuer).

The government wishes in particular to combat the informal economy in the case of those working in private households (so-called mini-jobs, in which people carry out largely domestic tasks). Accordingly, employer social security payments in these cases will be just 12%, made up of 5% for pension insurance, 5% for sickness insurance and 2% as a lump-sum payment.

Employees working in these mini-jobs will pay no social security on earnings up to €400 a month. They will also be exempt from social charges if this mini-job is performed as a secondary activity to a main job.

Those people employing workers on mini-jobs in their household (haushaltsnahe Dienstleistungen) may offset 10% of their expenditure, up to a maximum of €510 a year, against tax. Those people employing workers on a normal employment contract in their household may offset 12% of their expenses against tax, up to a maximum of €2,400.

Further, the new legislation introduces a buffer zone band of earnings (Gleitzone) for low-paid workers earning between €400 and €800 a month. This is to avoid a situation in which, as was previously the case, joint employer/employee social insurance contributions suddenly rose from 22% to over 40% once a worker's earnings exceeded the low-pay limit. This is targeted at combating the "low-pay trap" in which workers with relatively low incomes nevertheless are obliged to pay full social insurance costs.

Thus, in this new band, employee social contributions rise gradually, from around 4% on earnings of €400.01 to the full employee charge of around 21% on earnings of €800 a month. By contrast, employer social insurance contributions remain unchanged, at around 21% throughout this band.

Given the complexity of these tax and social insurance issues, the provisions will not come force until 1 April 2003.

The future

Although these reforms have been welcomed in at least some political quarters as a step in the right direction, there is some disquiet in regard to their effectiveness in the longer term.

The labour market

Berndt Keller, of the University of Konstanz, Germany, has been looking at this issue in depth¹. He states that the decentralisation of responsibility for labour market administration from federal to local level has been a key demand of reformers, as has the improvement of placement activities. However, he argues that the present reforms will not actually create any additional jobs: "The present problem of persistent mass unemployment has not been caused by inefficiencies within the existing job-placement services but by a considerable lack of jobs." He maintains that a realistic unemployment figure is about six million. This is the semi-official estimate, which combines officially registered unemployed people with the so-called silent reserve - those who have given up looking for employment but who would work if the labour market was more robust. He goes on to argue that the Hartz commission's targets of reducing unemployment by 50% by 2005 are "extremely ambitious and most likely highly unrealistic". He adds that the transformation of local employment offices into new, service-oriented job centres will constitute, as with all public sector reforms, a difficult task which will take a long time to complete.

The new PSAs

One of the most controversial measures undertaken by the labour market reform is the creation of the new personnel service agencies (PSAs). In many cases, these new agencies will come up against competition from the existing private temporary employment agencies (Zeitarbeitsfirmen) which currently operate in Germany. Professor Keller argues that the future relationship between these two forms of agency is far from clear. The publicly funded PSAs will be interested in a high number of job placements, while the private companies will first and foremost be aiming to make a profit. It may well be that the private agencies will focus either on small niches of the labour market or will concentrate on unemployed people who are easy to place, whereas those who are hard to place will be offered work by the PSAs. It is also not inconceivable that private agencies will be crowded out by the new PSAs. This development could also lead to normal jobs being substituted by subsidised temporary employment, which would actually serve to worsen, not improve, the labour market.

Although the incidence of temporary working is relatively low in Germany compared with some of its European neighbours (around 0.7% of overall employment or 1.3% of all employees subject to social insurance), temporary work has grown rapidly in recent years. It has been regulated to a certain degree, being used to cope with unexpected increases in workload or sudden staffing bottlenecks. Professor Keller argues that, from an outsider's point of view, it is rather surprising that so much political controversy is focusing on such a small fraction of the labour market: "One could well argue that there are more urgent labour market problems than the planned massive extension of this tiny segment whose success or net effect will at least remain uncertain."

One of the most controversial issues surrounding the new personnel service agencies, certainly between employers' organisations and trade unions, is the question of pay for workers placed by these new agencies. One of the key issues here is the question of whether the general principle of equal pay should apply between temporary and permanent workers or whether pay should be lower for temporary workers in order to make temporary employment more attractive to private sector employers. After heated debate, it was agreed that this issue should be resolved by means of collective bargaining rather than legislation. The social partners are therefore currently engaged in negotiating a new collective agreement for the temporary work sector. The agreement is likely to include a sub-standard level of pay for a limited period of time, particularly when placing long-term unemployed people and/or people with disabilities.

On a more general note, Professor Keller argues that establishing an additional segment within the overall labour market, characterised by insecure employment, low stability and high entry barriers to normal employment may increase the gulf between labour market "insiders" and "outsiders".

Professor Keller also makes the point that personnel service agencies can only function well if there is a considerable number of job vacancies. This is certainly not the case in the eastern part of the country, where unemployment rates are well above the national average, job vacancies hardly exist and prospects for future development are rather poor.

The "me-plc" structures

One argument put forward by some experts is that private service sector employment can be increased considerably by abolishing existing tax and legal barriers. Those taking the opposite view argue that the existing low-wage sector will only be significantly expanded by granting public subsidies, which in turn could lead to the phenomenon of the "working poor", who cannot support themselves even though they hold more than one job.

There may also be unintended consequences of providing public subsidies to people wishing to set up "me-plc" structures - they may have only limited effects as they might displace other unsubsidised jobs. Further, they will prove to be expensive because of the level of public subsidy involved. Finally, Professor Keller asserts that the assumption made by the Hartz commission that the future holders of "me-plcs" have been working illegally in the informal economy is not supported by empirical evidence.

Professor Keller concludes that it is as yet too early to make an overall assessment of the labour market reforms and the Hartz commission proposals, which have yet to be implemented. He does state, however, that, in contrast to the first term of the red-green coalition government, this second term is likely to be characterised by a period of intense activity in terms of labour market deregulation, which is not necessarily a positive development: "It is quite likely that the present red-green coalition government now intends to achieve too much within too short a period of time . . . it could well be that, in a period of persistently high and even increasing unemployment, uncoordinated activism has replaced coordinated activity."

¹"The Hartz commission's recommendations and beyond - an intermediary assessment", Berndt Keller, University of Konstanz, Universitätsstr. 10, D-78457 Konstanz, email: Berndt.Karl.Keller@uni-konstanz.de.