German Labor Reforms Create Greater Gap Between Rich and Poor

If nothing happens, the chasm between those who can participate in the growing prosperity and those who are left out of it will only continue to grow. The reforms of recent years have clearly failed to reach one of their two goals. More temporary labor and short-term employment relationships were intended to make the labor market more flexible and thereby lead to more employment, and this has been achieved. But they were also expected to form a bridge from unemployment into well-paid staff positions, which hasn't happened.

"The hopes of non-core and temporary workers of entering the core workforce and thereby participating in prosperity have hardly been fulfilled so far," says Lutz Bellmann, a labor market specialist at the Institute for Employment Research (IAB) in Nuremberg, a division of the Federal Employment Agency. Only about 8 percent of temporary workers are permanently hired within a year by the companies they are used in, he explains, and very few successfully negotiate the transition from mini-jobs and short-term work contracts into the safe world of wage-agreement tables and bonuses. As in society at large, Bellman says, "permeability decreases as you move up."

Ulrich Walwei, the IAB's deputy director, has just examined all the available labor market data. The results are clear: As qualifications decline, the risk of unemployment multiplies. In other words, education exponentially increases job prospects. As Walwei notes, the gap "between the wages of people with good and bad qualifications has grown in recent years." Those with poorer qualifications are highly likely to end up in precarious employment situations.

In fact, this growing chasm between the top and the bottom is not only growing in Germany, but also in many countries across the world, according to organizations such as the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD). Experts see the growing divide as a threat to long-term economic growth. "We will only achieve this goal if prosperity is distributed more widely throughout incomes," says Peter Bofinger, a prominent economist and government adviser.

Different Times, Different Challenges

But how can employees be given a share in the continually growing prosperity? And what role should politicians play if the parties to wage agreements are too overwhelmed to solve their problems?

Ten years ago, when Germany was stuck in a reform bottleneck and thousands of jobs were being lost to low-wage countries, there was a need for policies that promoted more jobs and economic competitiveness. But, today, the challenges are different. To narrow the gap between rich and poor, the labor market and the tax and social systems must be fundamentally altered:

• One reason that the low-wage sector has grown so strongly in recent years is that a statutory minimum wage only exists in certain sectors. If a minimum wage of €8.50 were introduced nationwide in Germany, 25 percent of all female employees would immediately earn more money, and some 15 percent of male workers would see their pay go up.
• The tax burden for higher earners has significantly gone down in recent years. First Helmut Kohl, the member of the center-right Christian Democratic Union who served as Germany's chancellor between 1982 and 1998, eliminated the wealth tax. And then Gerhard Schröder, the Social Democratic chancellor between 1998 and 2005, reduced the income tax. But both the IMF and the OECD say these steps went too far and recommend that the government tax the affluent more heavily again, possibly through higher levies on property or inheritances.
• Low-wage and normal earners bear a particularly large burden in the German social security system because, for example, health insurance premiums are only paid on up to €45,900 in gross annual income. All income above this threshold is not subject to a premium payment. As a result, a senior engineer with an annual income of €150,000 is only required to pay 6.6 percent of his total income in social security contributions, whereas a laborer who makes only a tenth as much is required to pay 20.7 percent of his income. However, the claims to unemployment compensation or a pension that he acquires with these payments are often only at the level of the welfare he would be entitled to anyway. To offset this disadvantage, years ago, the German Confederation of Trade Unions (DBG) called for a system of tax exemptions that would ease the burden on lower earners.

The Needed Agenda 2020

Those hoping to narrow the gap between rich and poor cannot put all their trust in the power of the unions and the forces of demographic change. They also have to emphasize political reforms. More spending on education and changes to the tax and transfer systems that would benefit low earners are needed. The series of labor market and welfare reforms known collectively as Agenda 2010, which Chancellor Schröder put in motion in 2003, completely reorganized the welfare state and were necessary for making Germany's economy globally competitive again. But, to achieve more social equality, we now need an Agenda 2020.

Indeed, what's needed is nothing less than a change in the system so radical that it would make the painful Hartz reforms (named after former Volkswagen exectuve Peter Hartz, who advised the Schröder government closely on its ambitious structural reforms) seem like cosmetic surgery by comparison. Hilmar Schneider, director of labor market policy at the Bonn-based Institute for the Study of Labor (IZA) and one of Germany's best-known employment experts, agrees. He notes that there is no alternative to making the working world more flexible, adding: "The days of small changes are over."

REPORTED BY SVEN BÖLL, MARKUS DETTMER, CATALINA SCHRÖDER, JANKO TIETZ AND FLORIAN ZERFASS

• Back
• 1
• | 2
• | 3
• | 4

• Part 1: The High Cost of Germany's Economic Success
• Part 2: On the Darker Side of the Labor Divide
• Part 3: Pitting Workers against Workers
• Part 4: What Politicians Have to Do