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The following OECD assessment and recommendations summarise chapter 3 of the Economic survey of Germany published on 9 April 2008.
Disincentives for women to work longer hours need to be reduced
Compared with other OECD countries, the number of hours worked per person employed remains low. This is mainly due to the low number of average hours worked by women, while hours worked by male workers compare more favourably with other reference countries. One reason for this outcome is the fiscal disincentive for second-earners to work longer hours. In particular, the joint taxation system as well as the free healthcare coverage for non-working spouses leads many women to work in part-time jobs with a low number of hours which are not liable for taxes or social security (mini-jobs). Consideration should thus be given to moving towards a system of individual taxation and to phase out the free healthcare coverage. In order to satisfy constitutional constraints, individual taxation could be combined with the option to shift the personal allowance from the non-working to the working partner. Corresponding social concerns about the availability of healthcare for non working spouses are taken care by the current health insurance reform, which introduces obligatory healthcare insurance and compensates insurance funds for non-contributing members from the budget (see below).
A further reason for low labour input by women is the lack of childcare provision. This is evident by the fact that fewer mothers with small children are employed in Germany than in other countries and those who work, do so for fewer hours. While childcare is cheaper in Germany than in many other countries, relatively little of it is available. The government plan to significantly expand the number of places until 2013 is thus important. The government should consider introducing a voucher system for childcare while resisting pressures to also subsidise parents who keep their children at home. Experiments have shown that such subsidisation can actually reduce attendance rates in childcare facilities, in particular of those children who would benefit most. To encourage greater private supply, the government should also consider easing regulations for the set-up of childcare facilities.
Average annual hours worked per person in employment
Note: Data refer to total employment for 2006 or 2005 and are from national accounts, or where these are not available, labour force survey sources.
Source: OECD, Hours Worked Database.
Impediments for long-term unemployed to take up work need to be reduced…
While the cyclical upswing is also increasingly affecting the long-term unemployed, their share in the total number of unemployed remains very high by international standards. A step in the right direction has been taken with the past Hartz IV reform of the labour market, which has significantly increased the work incentives by lowering unemployment benefit replacement rates and shortening their duration. Those reforms should not be rolled back as international evidence clearly suggests that they will have beneficial effects on labour supply and should lower the structural unemployment rate by around one half of a percentage point. While the supplementary benefit layer paid to former recipients of unemployment insurance benefits when they move into the new unemployment benefit II scheme smoothes the reduction in benefits it may also weaken work incentives. Consideration should be given to phasing out supplementary benefits in order to further strengthen work incentives.
In contrast to the reforms on the labour supply side, more needs to be done to raise labour demand, notably by tackling employment protection legislation (EPL). The past liberalisation of temporary work contracts has resulted in a sharp pick-up of temporary agency work contracts in the current upturn. While this has helped to increase the flexibility of companies and has also helped to keep labour costs down, it risks creating a dual labour market over the longer run where some jobs are more protected than others, leading to well-known insider-outsider problems. The government should thus consider easing employment protection legislation for regular job contracts, which is strict by international standards, in order to use the current upswing to create as many regular job contracts as possible. One option would be to replace the court route for dismissals for economic reasons with a formula-based severance payment, making the process more transparent and less uncertain.
The government’s decision to introduce minimum wages in the postal sector by legal extension of wage agreements is unfortunate, as it effectively means that those companies who are not part of the original wage agreement in the sector are forced to accept the wage costs of other companies in the sector, reducing competition. Moreover, there are discussions about establishing minimum wages in other sectors. If a minimum wage is deemed necessary to counter the negative effects of monopsonistic labour demand in certain areas, it should be applied on a nation-wide basis at a sufficiently low level that will not lead to job losses, i.e. below the level that would prevail in a market characterised by perfect competition. Based on experience in other countries, decisions on a general minimum wage level should be made by an independent commission of experts so as to avoid politicising these decisions, reducing the risk of the minimum wage being set at a level that harms employment.
… and work incentives for older workers further increased
One of the most visible successes of past reforms is the increase in the employment rate of older workers, by over ten percentage points since 2003. While employment rates are still below the OECD average, a considerable part of the gap has been closed. This reflects foremost efforts by the government to reduce the attractiveness of early retirement, for example by shortening the unemployment benefit duration for older workers and gradually increasing the age at which early retirement is possible. However, the recent decision to lengthen unemployment benefit duration for older workers might put some of the gains witnessed in older worker employment in jeopardy, even though the planned voucher scheme might alleviate the adverse effects. The current upswing should be used to further raise work incentives for older workers, for example by ending the subsidisation of the part-time employment scheme for persons above 55 years of age (Altersteilzeit) earlier than 2010 as is currently envisaged. This would also avoid ending this scheme during a potential downturn.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
Eine Druckversion des Policy Brief in deutsch (pdf Format) kann ebenfalls heruntergeladen werden. Es enthält die Gesamtbeurteilung und die Empfehlungen, aber nicht alle oben gezeigten Grafiken.
The complete edition of the Economic survey of Germany 2008 is available from:
For further information please contact the Germany Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by David Carey, Felix Hüfner and Nicola Brandt under the supervision of Andreas Wörgötter. Research assistance was provided by Margaret Morgan.