Economic surveys and country surveillance

Economic Survey of Germany 2006: Labour market reform should go on


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The following OECD assessment and recommendations summarise Chapter 4 of the Economic Survey of Germany 2006 published on 30 May 2006.
An excerpt, "Toward more efficient employment policies", is also available.


Reforms to strengthen employment performance need to be deepened and broadened

Major steps to strengthen employment performance were implemented over the last three years, focusing on reducing work disincentives associated with unemployment-related benefits, and better activation strategies for the unemployed. However, a range of issues still needs to be addressed to achieve success.

Obstacles to labour force participation need to be further reduced

Government plans to phase increases in the statutory retirement age from 65 to 67 years are welcome. Other distortions that create impediments to higher labour force participation of older people and spouses also need to be addressed:

  • Channels into effective early retirement outside the public pension system have gained importance, undermining efforts to activate older employees. New legislation cutting extended eligibility periods for unemployment insurance benefits for the older unemployed marks important progress in reversing this trend. Moreover, exemptions for older benefit recipients to search for employment should not be prolonged further. Subsidies for the old-age part-time work scheme (Altersteilzeit) should be removed.
  • Policies to improve the compatibility of child rearing and labour force participation of spouses should rank high on the policy agenda. This reinforces the case in favour of strengthening early education and child care in accredited facilities. The Government plans to extend child care support. Financial support for child-minding costs should be more focused on families where both spouses are working.
  • Average effective tax rates on labour income of second earners in households should be reduced while free health insurance for non-working spouses should be phased out.

Older people participating in pre-retirement programmes and active labour market schemes(1)

1. Considered in the pre-retirement programmes are recipients of unemployment insurance benefits of extended duration without obligation to search for a job, and participants in the subsidised part-time employment scheme for older people (Altersteilzeit).
Source: Eichorst and Spross (2005). “Die Weichen führen noch nicht in die gewünschte Richtung“, IAB Kurzbericht No. 16/2005.

Work incentives for the long-term unemployed can be improved further

The introduction of the new means-tested income replacement scheme (ALG II) for the long-term unemployed and welfare recipients marks progress toward more effective activation of benefit recipients who are able to work. Job-search requirements have been tightened and progress has been achieved in subjecting active labour market measures to evaluation. But several issues remain to be addressed:

  • Financial incentives for welfare recipients to pick up work remain low. One option of reform is to lower withdrawal rates of income replacement for welfare recipients who are able to work (unemployment benefits II.). At the same time, replacement rates should be revisited to preserve incentives to take up employment.
  • Within such a reform option, preferential taxation of small jobs paying very low earnings, which hardly benefit the unemployed, might be terminated.
  • Different schemes exist supporting self employment out of unemployment. These should be merged in favour of better targeting.
  • The wide application of new work provision schemes at municipalities or welfare associations (Arbeitsgelegenheiten) is likely to fail in its present form to ease the transition into non-subsidised employment or to function as willingness-to-work tests. To avoid generating new unemployment traps the remuneration associated with these schemes should be revisited so as to preserve incentives to take up work on the primary labour market. Welfare institutions participating in the scheme should bear part of its costs.

Withdrawal of benefits and taxation of gross income under unemployment benefits II(1)
Marginal implicit tax rate, per cent

1. Taken into consideration unemployment benefits II (Arbeitslosengeld II), housing benefits (Wohnkostenzuschüsse, Wohngeld), child benefits (Kinderzuschlag, Kindergeld), income taxes, social charges for employees. Regulation for western Germany as of fourth quarter 2005. For a married couple with gross monthly income between € 1 600 and € 1 700, the marginal implicit tax rate is strongly negative.
Source: ifo Institute for Economic Research.

Reorganisation of the Public Employment Service needs to continue

Successful public employment service (PES) institutions are outcome oriented. While major steps have been taken to strengthen the placement function of the PES, further measures seem necessary:

  • Counsellor-to-client ratios have improved significantly over the last couple of years, but are still below target. Further administrative reform is required to free resources for activation and placement.
  • Financing and decision powers with respect to getting the long-term unemployed into jobs remain dispersed between municipalities and the Federal Labour Office and differ across municipalities. Consideration should be given to concentrating responsibilities for benefit and employment policies at one level of administration. Allocation of responsibilities to the Federal Labour Office might be preferable. If instead responsibilities for ALG II-related policies are assigned to the municipalities, this should be accompanied by a financial mechanism, which provides incentives for municipalities to engage in efficient job placement.
  • The obligation for local employment offices to establish subsidised temporary work agencies proved to be costly without improving placement outcomes in general. This policy should be terminated. Regional Labour Offices should utilise external placement services on a competitive basis.

Higher flexibility in wages and work conditions is warranted

Firm-specific agreements between employers and employees have become a main driver for a higher degree of flexibility in work conditions and wages. Yet, wages need to be better aligned with skills, particularly at the low end of the wage distribution, and responsiveness to differential labour market conditions across firms and regions needs to increase further. Increasing the cost of unskilled labour through the introduction of statutory minimum wages risks counteracting policies that aim at reducing high unemployment rates among the low qualified and at improving employment chances for new labour market participants. Suggested policy action includes:

  • Administrative extension of collectively bargained contracts should only be applied if negative consequences for the labour market can be avoided
  • Consideration should be given to widening the scope for wage determination at the firm level so as to better align collective wage contracts with labour market conditions.

Employment protection needs to become more symmetric

Strict EPL tends to increase unemployment duration in particular for the low qualified and marginal groups in the labour market. At the same time, reaping the benefits of deepening international integration in goods and factor markets reinforces the need to allow for more flexible labour allocation. Recent legislation in favour of more flexible employment contracts gave preference to non-regular forms of employment, which may contribute to widening labour market segmentation. Plans by the new government to exempt the initial phase of an employment spell from dismissal protection while dropping the option to offer fixed-term contracts are welcome. Germany’s employment protection procedures should be reviewed further to reduce the legal costs associated with dismissals.

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
Der Policy Brief (pdf-Format) steht zum Herunterladen zur Verfügung. Er enthält die Gesamtbeurteilung und die Empfehlungen der OECD aber nicht alle Abbildungen auf den Seiten oben.

The complete edition of the Economic Survey of Germany 2006 is available from:


Additional information                                                                                                  

For further information please contact the Germany Desk at the OECD Economics Department at The OECD Secretariat's report was prepared by Eckhard Wurzel and Andrés Fuentes under the supervision of Andreas Wörgötter.


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OECD Economic Survey of Germany 2006: Toward More Efficient Employment Policies


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