Christian Wittneben
Robert Grundke
OECD Economic Surveys: Germany 2025
Abstract
Skilled labour shortages are becoming a major bottleneck for economic growth and the green and digital transitions. Labour supply incentives for women, low-wage earners and families with children should be strengthened by reducing effective tax rates when taking up employment or transitioning from part-time to full-time work, as well as through better childcare access and parental leave policies. This would not only boost labour supply but also help mitigate gender inequalities in career prospects, wages, and social protection, as most part-time workers are women. Reducing incentives for early retirement and improving working conditions and training for older workers are key to raise the effective retirement age. Reducing barriers to skilled migration and the labour market integration of migrants would also help address skilled labour shortages. As a high share of young adults has no professional degree due to weak foundational skills, including language skills, improving the quality of adult education and the VET transition system as well as basic education should become a key priority. Standardising quality certifications for training courses and improving the governance of the adult learning system would help increase take up and the quality of training.
The German labour market has exhibited notable resilience in recent years. Despite a declining working age population and an economy that has been disrupted by COVID-19 and the energy crisis, employment has increased to a record high, standing above 46.1 million in 2024. The increase of employment since 2010 has been driven by immigration and higher employment rates. While migrants from within the European Economic Area were the primary contributors to employment growth in the mid-2010s, the largest increase in recent years has come from third-country nationals, including refugees from Ukraine and non-European asylum-seeking countries (Gemeinschaftsdiagnose, 2023[1]). However, despite the strong increase in employment, the share of firms reporting severe difficulties to fill vacancies is the highest among OECD countries (Figure 3.1).
Firms reporting difficulties recruiting, 2022-2023, % of firms
Note: Respondents were asked if their firm encountered any difficulties in recruiting employees in the last 24 months. Severe shortages occur if all or most (as opposed to some, few or none) of the opened vacancies in the firm were hard to fill. OECD is computed as the unweighted average of the member countries shown on this graph.
Source: (Filippucci, Laengle and Marcolin, forthcoming[2]) based on GFP Employer Survey data.
Rising skilled labour shortages are related to a secular decline in working hours and increasing mismatch in the labour market (Figure 3.2). The decline in working hours is mainly due to an increase in the number and share of employees working part-time, which increased from 19% in 2000 to 29% in 2023. Although part-time employment increased across genders and age groups, this has been particularly pronounced among women, parents and older workers, who have increasingly entered the workforce (Bick, Blandin and Fuchs-Schündeln, 2022[3]). The high vacancy rates and low unemployment indicate that it is also increasingly difficult to match job seekers with open positions, which is related to rising skill mismatch or decreasing labour mobility (Figure 3.2). Labour hoarding and declining reallocation rates during and after the pandemic have likely contributed to decreasing matching efficiency and exacerbated skilled labour shortages (see Chapter 2) (Deutsche Bundesbank, 2022[4]). Demand for skilled workers exceeds supply particularly in renewable energy and heating, nursing and healthcare, civil engineering and construction, hospitality, and transport (BA, 2024[5]). The lack of qualified workers in construction and renewable energies risk becoming a major bottleneck for infrastructure investments, hampering the green and digital transitions. Skilled labour shortages in some sectors and occupations are also related to working conditions and low wage levels, the increase of which could help making these jobs more attractive, including for young apprentices.
Note: The job vacancy rate is the number of job vacancies expresses as a percentage of the sum of the number of occupied posts and the number of job vacancies.
Source: Eurostat; OECD Employment and Labour Market Statistics (database).
Existing labour shortages will be exacerbated by rapid population ageing, as the working age population is expected to shrink by about 9% over the next 10 years (BMWK, 2024[6]). The share of workers above the age of 55 is particularly high in many occupations, which are already experiencing severe labour shortages, for example medical doctors but also lower-skilled occupations in logistics, construction and retail. Birth rates have also been on a downward trend, reducing future labour supply potential. To mitigate the decline in labour supply, it is key to improve work incentives in the tax and transfer system, continue to expand childcare services, support longer working lives and further reduce barriers to skilled migration and the labour market integration of migrants. Strengthening training and adult learning policies is needed to equip workers with the skills needed in the labour market, in particular as skill needs will change due to the green and digital transitions (OECD, 2024[7]). Improving the quality of education is key for mitigating skilled labour shortages and raising economic growth in the long term.
3.2.1. Reducing marginal effective income tax rates to raise labour supply incentives
High part-time employment among women is a main reason for low average working hours per employee (Figure 3.3). While this is partly related to social norms and preferences as well as the availability of childcare, economic incentives embedded in the tax and transfer system play a significant role for labour supply choices and can also influence these preferences (Bick and Fuchs-Schündeln, 2018[8]). Countries with joint or partially joint taxation of couples and progressive tax rates show higher part-time employment rates of women than those with individual taxation systems (Lembcke, Nöh and Schwarz, 2021[9]). Although the availability of childcare services and the design of child benefits also influence labour supply decisions of women with children, they cannot explain the high share of married women without children working part-time which stands at about 45% (Figure 3.3) (Lembcke, Nöh and Schwarz, 2021[9]).
Note: Part-time employment is defined as working less than 30 hours per week in the main job. Children are defined as children under 14 years of age living in the household.
Source: OECD Employment and Labour Market Statistics (database); (SVR, 2023[10]) based on SOEP v37.
The current joint taxation of married couples strongly benefits households with unequal income distributions between spouses, leading to high effective tax rates for second earners, who are mostly women (Blömer, Fischer and Peichl, 2023[11]). Germany’s participation tax rate for taking up work, if the married partner is working full-time is among the highest across the OECD (Figure 3.4). Due to the progressivity of the tax schedule, the advantage for married couples over individual taxation increases with income: For a single earner couple with average household income, the advantage in 2021 was EUR 5 500 per year, but it can be as high as EUR 17 000 for high income earners (Becker, 2021[12]). Replacing the joint taxation of couples with individual taxation would improve work incentives for second earners but lead to significantly higher tax payments for households where one partner earns substantially less. This would decrease work incentives for first earners and raise tax revenue by about EUR 30 billion annually (Bach et al., 2020[13]). Any reform of the current joint income taxation of couples should therefore be combined with a reduction in income tax rates or social security contributions, which taken together are among the highest across the OECD (see below).
Moreover, replacing joint taxation with individual taxation does not comply with the constitutional requirement to account for financial support obligations between spouses in the tax system. One option in line with constitutional requirements would be a real-splitting system, which taxes spouses individually but allows for partial income transfer in the form of a fixed allowance, which can be freely split between partners, to recognise mutual financial obligations. While larger effects on labour supply are possible with more fundamental changes to the tax system, this proposal best balances incentives and legal requirements (Bach et al., 2020[13]). Combining real-splitting with an increase in child allowances that cannot be split between partners would further decrease marginal tax rates for second earners and favour families with children. Simulations show that replacing the current joint taxation system by a real splitting system combined with additional child allowances and lower income tax rates can be budget-neutral, inequality-reducing and raise working hours by 0.16 % or 59 thousand full-time equivalents, mostly driven by increased labour supply by women (Blömer, Fischer and Peichl, 2023[11]).
Disincentive to take up work when partner is working full-time (participation tax rate), %, 2024
Note: The participation tax rate is the percentage of additional gross income that is withheld through taxes, social contributions, and benefit withdrawal when taking up a job, while the partner is already working full-time. The figure shows the participation tax rate for a married couple with two children when the main earner works full-time at 90% of the average wage and the other partner takes up 60% part-time employment at the same wage level. Calculations assume two children aged 4 and 6 and an annual rent equal to 20% of the average wage.
Source: OECD calculations based on output from the OECD tax-benefit model (version 2.7.1.).
Another important factor for high marginal effective tax rates for second earners is the current system of joint health insurance (Blömer and Peichl, 2020[14]). It allows married couples to insure a non-earning spouse at no additional cost if they earn less than the Mini-Job income threshold (below a monthly income of EUR 556). If second earners pass this threshold, marginal effective tax rates strongly increase not only due to the joint income taxation of couples but also due to the obligation to pay social security contributions for health insurance (Figure 3.4). A more balanced approach would involve adjusting health insurance premiums to reflect the number of adults in a household, regardless of employment status, as suggested in previous OECD Economic Surveys of Germany. This would raise work incentives for second earners while ensuring a fairer distribution of health insurance costs across households.
The reform of the joint income taxation and health insurance of couples should be combined with a reform of the Mini-Job regulation. Subsidising employment by exempting Mini-Jobs from income taxes and employees’ social security contributions has been successful in stimulating employment for low-skilled workers. However, in combination with other features of the tax and transfer system, such as the joint income taxation of couples, it has locked many workers in part-time jobs with low levels of social protection, training access and career prospects (Bruckmeier et al., 2022[15]). About 7.9 million workers or about one sixth of the workforce are working in Mini-Jobs, 4.5 million of which have no other regular job, while 56% are women. They often work in jobs for which they are over-qualified (Blömer and Consiglio, 2022[16]). Mini-Jobs are most prevalent in hospitality, retail, and domestic services. Although a 2022 reform has introduced smoothly increasing social security contributions for employees above the Mini-Job income threshold, second-earners with a Mini-Job still face steeply increasing effective marginal tax rates due to joint income taxation rules for couples (Blömer and Consiglio, 2022[16]). To partly finance the decrease of contributions for employees above the threshold, employer contributions above the threshold were increased, which creates incentives for firms to shift employment from regular jobs to Mini-Jobs (Bruckmeier et al., 2022[15]). The income threshold until which social security contribution rates progressively increase for employees was raised from EUR 1 600 to EUR 2 000 (Midi-Jobs), raising labour supply incentives and real incomes for low-wage earners, but incentivising workers with incomes above this threshold to reduce working hours (Blömer and Consiglio, 2022[16]).
To improve the attractiveness of regular jobs, Mini-Jobs should be restricted to school and university students, who cannot work full-time besides their studies. At the same time, the income threshold at which social security contributions for regular jobs progressively increase (Midi-Jobs) should be lowered towards zero (Bruckmeier et al., 2022[15]). Arguments against restricting the use of Mini-Jobs include lower administrative burden and firing costs, which provides more flexibility to firms in sectors with high demand fluctuations (Sperrmann, 2022[17]). However, the market for temporary work agencies is well-developed in Germany, providing firms with a flexible pool of about 1 million workers (Spermann, 2013[18]). In addition, firms also have the option to hire workers on temporary contracts which can be extended up to two years (Feld, Iglesias and Weigert, 2015[19]). Although Mini-Jobs might help to reduce informality in sectors such as hospitality, recent studies indicate that since the introduction of Mini-Jobs in the early 2000s informality has not decreased on average and remained at about 16-17% of GDP (Elgin et al., 2021[20]; Kelmanson et al., 2019[21]). Another policy lever to fight informal work is to improve enforcement capacities and introduce an obligation to document working hours of employees.
As the decline in average working hours is also related to employees working fewer hours on average, it is important to improve labour supply incentives by lowering effective labour taxes, which are among the highest across the OECD (Figure 3.5). Although the payment of social security contributions entitles workers to receive pension benefits, a measure adjusting for these entitlements still indicates a relatively high taxation of labour in Germany (Bundesbank, 2024[22]). Moreover, as thresholds in the progressive income tax schedule are not indexed to inflation, effective personal income tax rates increase when wages rise in the context of high inflation, particularly for low- and middle-income households. Although the government has regularly adjusted the tax schedule and tax allowances, adjustments have not always been sufficient to fully account for inflation (Dziadkowski, 2022[23]). Linking allowances and the tax schedule directly to inflation would prevent automatic increases in effective tax rates. This should be combined with a reform of the tax schedule that improves labour supply incentives by lowering income tax rates and smoothing kinks at the lower end of the linear progressive tax schedule (Bach, 2021[24]). The total fiscal cost of a comprehensive reform of labour taxation depends on the exact design of reforms but will likely need to be financed by raising revenue from property taxes and health excise duties and reducing tax expenditures in capital income, inheritance, VAT and environmental taxation (see Chapter 1).
Another reason for low average working hours is the relatively high amount of sick leave. Already before the pandemic, Germany had one of the highest sick leave rates among advanced countries. Employees are entitled to up to six weeks of sick leave at full pay (OECD, 2024[25]). The rise in sick leave days since 2022 is likely driven by improved electronic tracking of sick leave through insurers and greater awareness of infection risks, which encourages sick employees to stay home (Ziebarth and Pichler, 2024[26]). Despite the recent tracking improvements, Germany still lacks a unified and representative administrative database that accurately records sick leave by cause and duration, as information whether a worker is back to work earlier than originally notified is not collected. While higher sick leave days may adversely affect labour costs in the short run, enabling sick employees to recover fully before returning to work could ultimately support productivity and workforce participation (Saint-Martin, Inanc and Prinz, 2018[27]). However, there is scope for making sick leave more flexible, for example by making more use of instruments like gradual re-integration. The current possibility to certify sick leave remotely should not be abolished, as its potential benefit to reduce infection transmission outweighs potential costs (Ziebarth and Pichler, 2024[26]).
To a certain extent, the decline in working hours, in particular for higher-skilled workers, is also related to changing preferences and increasing consumption of leisure with rising incomes (Bick, Blandin and Fuchs-Schündeln, 2022[3]). The share of workers in the highest quintile of the salary distribution, who would like to work at least four hours less than they currently do, increased from 44% in 1993 to 51% in 2018 (Beckmannshagen and Schröder, 2022[28]). Early retirement is also partly related to this change in preferences and rising incomes, as a significant share of workers retiring early are high-wage workers (see below). As rising wages in occupations in shortage might lead to even stronger decline of labour supply among high-skilled workers, a reform of labour taxation should be combined with fostering business dynamism and innovation to raise productivity and stimulate labour-saving technological change (see Chapter 2).
Average tax wedge decomposition, % labour costs, 2024
Note: The tax wedge is the sum of personal income tax, employee plus employer social security contributions, minus social benefits as a percentage of labour costs. In panel A, the tax wedge is shown for a single individual without children earning 100% of average wage. In panel B and C, the tax wedge is shown for a single individual without children earning different income levels of the average wage (AW).
Source: OECD Taxing Wages database.
3.2.2. Improving the design of social transfers to raise labour supply incentives of low-income earners and households with children
Incentives in the tax and transfer system to expand working hours are particularly weak for low-wage earners. The share of workers in the lowest quintile of the salary distribution, who would like to work at least four hours more than they currently do, strongly increased from 8% in 1993 to 23% in 2018 (Beckmannshagen and Schröder, 2022[28]). Despite recent reforms to smooth the labour tax schedule for low-income earners by introducing progressively increasing social security contributions above the Mini-Job threshold, effective marginal tax rates were still close to 100% or above for lower incomes in 2023 (Figure 3.6, Panel A and C). Due to the design and withdrawal rates of different social transfers, including basic income support, the child-supplement and housing benefits, net incomes remain constant or even decrease with an increase in gross income (Blömer et al., 2021[29]; SVR, 2023[10]). This effect is even more pronounced for lower-middle income households with children which receive child benefits (Figure 3.6, Panel B and D). The lack of coordination between housing and different child-related benefits creates steep effective marginal tax rates as high as 100% for these households.
Effective marginal tax rate (in %) per gross income measured in % of average earnings, 2024
Note: The vertical axis shows the marginal effective tax rate for a 10 percentage point increase in earnings at selected gross earnings levels (measured in % of average wage on the horizontal axis) when working full-time. Scenarios with children are based on two children at the ages of 4 and 6. Annual housing costs are assumed to be 20% of average wage. Median and percentile values for OECD are based on OECD countries except Germany and Chile. Results are based on rules as of 1 January 2024 for Germany, and as of 1 January 2023 for the OECD average.
Source: OECD calculations based on output from the OECD tax-benefit model (Model version 2.7.0).
Better designing and coordinating the different social transfers so that effective marginal tax rates do not rise with incomes as benefits are withdrawn is key to improve labour supply incentives for low-income earners and households with children. However, this requires better coordination across social transfers which is complicated by the fragmentation of social transfer administration across ministries. Consolidating the different social transfers under one ministry could facilitate coordination to lower effective marginal tax rates for low-income earners. For example, integrating housing benefits into the basic income support while lowering transfer withdrawal rates and introducing allowances could increase labour supply by an estimated 144 000 full-time equivalents (Blömer, Hansen and Peichl, 2024[30]). However, lower transfer withdrawal rates will also increase the number of eligible transfer recipients, extending benefits to some middle-income households and implying rising fiscal costs. Nevertheless, comprehensive reform options can be made fiscally neutral, while raising labour supply by about 100 000 full-time equivalents, mainly through higher participation rates among formerly inactive workers, and poverty could be reduced by 0.9 percentage points (SVR, 2023[10]).
Increases in the level of basic income support have had limited effects on labour supply incentives of low-wage earners. Although the level of basic income support was raised by 26% from 2021 until 2024, taking up a job out of unemployment still leads to higher net income (Blömer et al., 2024[31]). This is because wages strongly increased at the bottom of the wage distribution due to minimum wage increases of about 30% since 2021: According to the Federal Statistical Office, nominal wages of full-time employees increased by 36% in the first quintile from January 2022 to October 2024. Moreover, as costs for food, which form a large part of the consumption basket of poorer households, have increased by about 30%, the real value of social benefits has not increased much. Taking up a full-time job for unemployed singles results in participation tax rates of around 75 to 80%, and participation tax rates never exceed 100% for other household types (Blömer et al., 2024[31]). Of the 5.5 million people eligible to receive basic income support, only a minority could work but instead receives social benefits: 1.5 million are children and about 2 million are adults who work and receive benefit top-ups as their wages are too low for financing the subsistence consumption of their households. They are engaged in trainings or caring for children or older persons, or they face temporary illness or incapacity, with most recipients facing multiple hardships (Fitzenberger, 2024[32]).
Nevertheless, since 2022, job finding rates for individuals receiving basic income support have decreased (Weber, 2024[33]). This is mainly related to the large influx of Ukrainian refugees receiving basic income support, for whom it was more difficult to find jobs due to limited German language skills and supply constraints in childcare services, as well as fewer job offers due to the economic downturn. However, the relaxation of sanctions for non-compliance with mandatory employment services for people who receive basic income support have also played a role. The recent strengthening of sanctions for refusal of job counselling, training or job offers is welcome. However, the prioritisation of job placement over vocational education and training or adult education, which was abolished by the 2022 reform, should not be reintroduced. About 55% of unemployed individuals lack a vocational or professional degree, severely hampering their long-term employability (Bundesagentur für Arbeit, 2022[34]). Fostering the re- and up-skilling of the unemployed is key to address skilled labour shortages and help displaced workers adjust to the changing skill demands during the digital and green transition. It is a major step forward that the employment agency can fully fund vocational training as well as foundational skills courses (e.g., literacy or computer skills), and pay a monthly education premium of EUR 150 for training leading to a qualification.
3.2.3. Stepping up family policies to raise female labour supply: childcare and long-term care
While the share of fathers taking parental leave has increased considerably since the 2000s, paid parental leave entitlements still exhibit significant gender disparities, with women receiving among the longest paid birth-related leave across OECD countries (Figure 3.7). This reinforces gender roles in care activities, reduces labour market participation of women and negatively affects their future earnings, contributing to explain why the gender wage gap remains above the OECD average. Currently, the 12 months of paid parental leave can be split between parents, but each parent is required to take a minimum duration of two month. Parents are also entitled to two months of extra paid parental leave extending the total to 14 months. Since April 2024, parents can receive paid parental leave simultaneously for only up to one month during the first 12 months of the child's life, which is welcome. Further increasing the minimum duration of parental leave for each parent while limiting the overlap of leave periods could help further increasing the role of fathers in childcare. This could help further lower the opportunity costs of childbearing for women, particularly among higher-educated women for whom birth rates are particularly low in Germany (Raute, 2019[35]; OECD, 2024[36]). A 2023 reform abolishing paid parental leave for high-income couples earning over EUR 175 000 of taxable income should be evaluated in this context. Reducing the total duration of paid parental leave, which is high in international comparison, could help reduce fiscal costs, which amounted to about EUR 8 billion in 2024.
Note: Panel A and B refer to paid leave entitlements reported in full-rate equivalent. For example, if leave entitlements only cover 50% of previous earnings, the duration shown in the figure is half of the leave duration.
Source: OECD Family Database, https://www.oecd.org/en/data/datasets/oecd-family-database.html
Further expanding access to affordable, high-quality childcare is critical for boosting labour force participation of women and supporting children’s skills development. A major step forward was Germany’s 2013 introduction of a legal entitlement to childcare for kids between the age of one and three years. Large investments have expanded the supply of institutional childcare infrastructure, and childcare costs are comparatively low by international standards according to the OECD Social and Welfare Statistics. However, the share of children under the age of three enrolled in day care remains low at about 34% in 2019, although it has significantly increased from 12% in 2006. Severe labour shortages still hamper access to childcare services and an estimated additional 400 000 childcare places are still needed (Bertelsmann Stiftung, 2023[37]). Improving recruitment and training, facilitating the recognition of foreign qualifications, reducing the administrative tasks of childcare staff, and raising salaries are key to address these shortages (Bock-Famulla et al., 2022[38]). Moreover, expanding options for regulated, high-quality home-based care could help address shortages and provide more flexibility to working parents (Box 3.1). The number of home-base care places stood at about 150 000 in 2024 and has declined in the past four years. Educational requirements for home-based providers are low, with a standard curriculum of just 160 hours. When expanding home-based care places, improving the quality of vocational education of home-based providers is key to help equip children with the foundational skills needed to succeed later in life (see below).
Improving long-term care (LTC) for older individuals could also help raise female labour supply. In Germany, most of the care for older people is provided informally and predominantly by women, who care for spouses or parents. This reduces their formal labour market participation, affecting wages and pension entitlements, and significantly reduces overall tax revenues and social security contributions by about 1% of GDP (Llena-Nozal, 2022[39]). As the share of older individuals requiring daily assistance will rise further, putting pressure on women to reduce formal labour supply, it should be a key policy priority to improve the supply and funding of long-term care services. Although a mandatory public long-term care insurance has been introduced in 1995 financed by social security contributions, the deficit in the current system has increased strongly in recent years and only a part of individual care costs can be funded (see Chapter 1). A significant portion of older peoples’ care costs is privately funded, with about one-third of nursing home residents relying on means-tested social assistance (Geyer et al., 2024[40]). To improve the supply of old-age care services and allow women to increase labour market participation, the rising deficit of the public long term care insurance should be addressed by limiting the increase of LTC benefits, raising spending efficiency in institutionalised care and encouraging personal savings for care-related expenses (see Chapter 1). Spending efficiency should be increased by strengthening home-based professional care, as the share of individuals with low or moderate care needs allocated to institutionalised care is much higher than in other OECD countries (OECD, 2024[41]). Moreover, gradually increasing transfers from the core budget to strengthen the care reserve fund would help prevent strongly rising contribution rates that would increase the tax-wedge on labour even further (see above). Shifting care from private to professional care will also require addressing skilled labour shortages, for example by facilitating the recognition of foreign qualifications for nurses and care personnel (see below) and improving working conditions.
The Danish early childhood education and care (ECEC) system includes day care centres (age-integrated or separate nurseries/kindergartens) and regulated private home-based care. Municipalities provide ECEC for children from 26 weeks until primary school, covering at least 75% of costs, with free provision for low-income households. Children typically start ECEC at around 10 months of age, and participation rates are among the highest in the EU (72% for under-threes and 97.5% for over-threes as of 2017). ECEC settings follow binding pedagogical guidelines, and municipalities guarantee a legal right to a place for every child. If local provision is unavailable, parents are compensated through subsidies for private care coverage. Participation is generally voluntary but mandatory from age one for children in marginalised areas. The system is overseen by the Ministry of Children and Education.
3.2.4. Supporting longer working lives
Creating the conditions for older and more experienced workers to work longer is key to address skilled labour shortages. Germany made remarkable progress in fostering employment among older workers. Employment rates of persons between 60 and 64 years grew continuously from 20% in 2000 to 65% in 2023. Employment expanded particularly strongly among women in this age group. The average retirement age strongly increased during the 2000s, but it has not changed much since 2012 (BMAS, 2022[44]). This is related to the extensive use of early retirement options which keeps the effective retirement age significantly below the legal retirement age of currently 66, which will increase to 67 by 2031. The average effective age of labour market exit is below 64 for men and women, which is almost one year below the OECD average for men; for women the difference is about 0.2 years (OECD, 2023[45]).
Reducing incentives to retire early is key to extend working lives. Pension benefit reductions for early retirement for individuals with at least 35 working years are much smaller than in other OECD countries, explaining the relatively high share of workers that retire early and accept pension reductions (see Chapter 1) (OECD, 2021[46]). In addition, since 2012 individuals with at least 45 working years can retire without any loss of pension entitlements. While this policy aims to support people in physically demanding jobs who started working at an early age, have not completed a tertiary degree and earn on average lower wages, it is not well targeted (SVR, 2023[10]; Buslei et al., 2024[47]). Many workers in physically demanding jobs drop out of the workforce due to health issues and fail to qualify for the scheme, while most workers on the scheme have higher wages and pension claims, and better health outcomes than non-beneficiaries. Thus, the scheme further increases the overall regressivity of the German pension system (Buslei et al., 2024[47]). These fiscal incentives for early-retirement should be phased-out so that pension benefit reductions are at least actuarially neutral (Pimpertz, 2022[48]). At the same time, there is scope to increase basic income support in old age and disability pension benefits or introduce a guaranteed minimum pension, as the risk of old age poverty is relatively high compared to other countries such as Denmark or the Netherlands (OECD, 2021[46]).
Another scheme allows employees aged 55 or older to transition into part-time work, while a mandatory top-up of reduced wages is exempted from taxes and social security contributions. The bilateral agreement between workers and employers is for up to five years and requires a reduction of working hours but allows for part-time to be taken “en-bloc”, i.e. working full-time the first years and exiting the labour market afterwards, which is by far the most frequently chosen option (BMWK, 2024[6]). To increase incentives for experienced and healthy workers to work longer, early-retirement through subsidised “en-bloc” part-time arrangements should be abolished. In addition, the statutory retirement age should be linked to life expectancy increases beyond 2031 (see Chapter 1). Maximum thresholds for wage earnings that are not deducted from pension entitlements received before the statutory retirement age have been recently abolished. This should be carefully evaluated, as this might further increase incentives to retire early.
This should be combined with improving adult learning opportunities to help older workers transition to less physically demanding jobs and support longer working lives. Older workers with higher digital skills have better employment chances, higher wages and are less likely to be replaced by technology (Falck, Lindlacher and Wiederhold, 2022[49]). However, older workers are much less likely to participate in adult learning, which is related to lower returns to participate in training given shorter remaining working lives, ageist attitudes of employers, and limited or inadequate training opportunities, but also to lower foundational skills and motivation of older workers (OECD, 2021[50]; van Dalen and Henkens, 2019[51]). A promising step to tackle the participation gap was taken by the Skills Development Opportunities and Work of Tomorrow Acts, which cover training costs of workers older than 45 years for SMEs. However, continuing vocational education and training (CVET) programmes need to be better targeted and adapted to older workers, for example by providing greater support when using digital learning devices, and combined with targeted career advice and guidance services (KOFA, 2022[52]; OECD, 2019[53]). In addition, working conditions and preventative health services should be improved to promote longer working lives. Increasing the retirement age of women from 60 to 63 has increased psychological and other health problems, as many employers have not adapted working conditions (Barschkett, Geyer and Haan, 2022[54]). To adjust working conditions to the needs and capacities of older employees, firms should offer more flexible working hours, more vacation and extend home office arrangements (KOFA, 2022[52]). Promoting longer working lives is also key for the public sector. In 2018, only 20% of public employers planned to retain their workers eligible for retirement, which is significantly below the average in the private sector (Westermeier and Wolf, 2020[55]).
In addition, incentives to continue working beyond the legal retirement age should be improved. While only 26% of companies wanted to keep their workers who were eligible for pensions in 2015, the share increased to 58% in 2018. However, more than half of workers who were retained after reaching the statutory pension age switched to part-time employment, mostly in Mini-Jobs that are exempted from social security contributions (Westermeier and Wolf, 2020[55]). This is mainly due to stringent employment protection, which makes it very costly for firms to end regular contracts (see Chapter 2). Plans to abolish restrictions on repeated fixed-term contracts for workers above the retirement age should be implemented, while Mini-jobs should be restricted to students. Moreover, since 2017, the Flexi-Rente introduced incentives to continue working beyond the statutory retirement age by introducing the option to raise pension benefits by working longer. Implementing plans to also allow for direct pay out of these accumulated additional pension benefits upon retirement would strengthen incentives to work longer for people with lower life expectancy. Introducing additional flexibility by allowing the pay-out of social security contributions for pensions and unemployment insurance instead of the accumulation of additional pension benefits would also be an option.
Since the early 2010s, high net immigration from other EU countries has compensated for population ageing and has been a major driver of economic growth. With mounting labour shortages in these countries exacerbated by population ageing, skilled migration will increasingly need to come from non-EU countries (Adunts et al., 2022[56]; SVR, 2022[57]). Simulations conducted for the previous OECD Economic Survey of Germany show that net migration of about 600 000 workers per year, about the average yearly net immigration during the 2010s, would be needed to maintain living standards at their current levels. To maintain the competitiveness of export-oriented manufacturing sectors, integration of workers with vocational education and training (VET) is particularly important (Bickmann, Grundke and Smith, forthcoming[58]).
The recent changes in migration policies are a major step to reduce barriers to skilled migration from non-EU countries and enhance labour market participation. Economic migration of low and medium skilled workers from non-EU countries to Germany has been complicated in the past due to complex and lengthy recognition procedures for foreign qualifications, which were often needed for labour migrants, even in unregulated professions. A new law allows individuals with a minimum of two years of work experience and a recognized qualification by the country of origin to receive a temporary residence permit for employment and migrate to Germany, if they have a job offer in a non-regulated profession. The job offer must assure an annual gross salary of at least EUR 43 470 or the employer must be bound by a collective agreement. Regulated professions, for example in healthcare, education or certain professional services, require recognition of foreign qualifications. Moreover, a point-based job seeker visa has been introduced, which ranks candidates based on qualifications, language proficiency (in German and English), work experience, and other factors like connections and family ties to Germany. It allows selected individuals to enter Germany for one year to search for a job. Moreover, the EU Blue Card regulation, which had significantly facilitated migration of tertiary education graduates with a job offer in IT sectors and a salary above a certain threshold, has been extended to other sectors and occupations. At the same time, agreements with several source countries have been established to return asylum seekers who did not receive refugee status, reduce irregular migration and promote the newly established skilled migration paths, for example from Western Balkan states.
Despite these significant improvements, complex and lengthy administrative procedures necessary to receive a visa and temporary residence permit and a lack of digitalisation cause uncertainty and high costs for migrants and potential employers. Continuing the digitalisation and acceleration of bureaucratic procedures, particularly the visa application, and improving the coordination of the different procedures in centralised migration offices at the Laender level is key. Moreover, lengthy administrative procedures for the recognition of qualifications in regulated professions are a large barrier for skilled migration, although labour shortages in sectors such as healthcare, child and long-term care, and education are high. The recognition procedures are decentralised at the district level and coordination across the different administrations remains weak. Establishing a nationally centralised database, where all successful recognitions of foreign qualifications must be recorded, would greatly facilitate the recognition of foreign qualifications and create efficiency gains for the public administration. Such a database exists already for the recognition of foreign university degrees and should be expanded to include all professional degrees in regulated professions.
Reducing administrative burden should be combined with strengthening policies to attract potential labour migrants. Potential migrants from non-EU countries value the career and employment opportunities, high quality of life and security in Germany and are willing to learn German if this improves their chances to work in Germany (OECD, 2022[59]). As intra-EU migration will likely slow down further, scaling up current advertisement and recruitment measures to facilitate skilled migration from non-EU countries, improving support for job-search and promoting German language courses abroad is key to realise this migration potential. Germany is already active in the field of international VET cooperation, and these initiatives could help to attract future skilled migrants (Azahaf, 2020[60]). Visa processes for international students should be accelerated, as students represent a talent pool that is likely to stay (OECD, 2024[61]).
Improving the labour market integration of migrants who are already in Germany is another key policy lever for addressing skilled labour shortages. The gap in labour market participation rates between migrants and natives is among the highest across OECD countries (Figure 3.8). However, while the employment rate of refugees in Germany is very low at less than 10% in the first year after arrival, refugees achieve an employment rate of 63% after seven years (Brücker et al., 2024[62]). Lengthy asylum procedures, employment and residence restrictions hamper labour market integration of humanitarian arrivals during the first years, while participation rates for women are particularly low, in part due to the limited availability of childcare services. The time asylum seekers have to wait until they can participate in the labour market has been reduced to a maximum of six months recently, which is welcome. This should be combined with accelerating asylum procedures, allocating asylum seekers according to local labour market opportunities, and improving access to childcare services. Measures such as the Chancen-Aufenthaltsrecht, which provides legal residency for migrants with temporary status (i.e. who were denied asylum status but cannot be re-transferred), can also help improve labour market integration. As many refugees have significant deficits in foundational skills, improving basic education and vocational training for migrants is key (OECD, 2024[61]).
Note: OECD is calculated as an unweighted average of OECD available countries.
Source: OECD Migration Statistics (database); OECD (2024), International Migration Outlook 2024, OECD Publishing, Paris, https://doi.org/10.1787/50b0353e-en.
3.4.1. Improving vocational education and training (VET)
Germany's work-and-school-based “dual” vocational education and training (VET) programme has been very successful in preparing young individuals with the skills needed in the labour market. However, despite firms complaining about skilled labour shortages, about 16% of applicants to apprenticeship positions did not receive a suitable offer while the number of unfilled positions is increasing (Figure 3.9). This mismatch is related to regional mismatch of applicants and vacancies, information asymmetries regarding labour market opportunities and training content, unattractive wages and working conditions, as well as a lack of foundational skills among applicants, in particular concerning language and social skills. Efforts to better inform students in lower secondary education about the content of apprenticeship programmes and skill needs in the labour market should be strengthened. The recently introduced mobility subsidies for apprentices and housing subsidies should be expanded to match support available to university students, with firms helping fund the expansion. Relocation grants could further improve regional mobility.
Social partners also have a large role to play in raising the attractiveness of VET for young people. Vacancy rates are highest for many occupations in the construction and health sectors, where wages and working conditions are often less attractive than in other occupations. Although wages have increased for some occupations with the highest shortage in apprentices in recent years, collective bargaining agreements should focus more on wages and working conditions for apprentices, including better regulating working hours. Regular audits can help ensure a safe and conducive learning environment in all participating firms. Strengthening outreach activities of firms in secondary schools, including training fares, can help reduce information asymmetries and improve the image of VET among upper secondary students. Raising investments in vocational schools, technical equipment and teacher training is needed to maintain the quality of VET (Hippach-Schneider and Huismann, 2024[63]). Given rapidly changing skill requirements due to the digital and green transition, the acquisition of general transversal skills, such as literacy, numeracy, creative thinking, social and language skills as well as digital skills should become a key part of VET programmes, which would also increase their attractiveness for secondary school graduates (Hampf and Woessmann, 2017[64]).
Note: The graph shows the number of vacant VET positions and applicants without a suitable offer at the end of the application cycle in each year (30 September).
Source: Datenreport zum Berufsbildungsbericht 2024 (BIBB, 2024[65]).
Improving foundational skills of students, including language and social skills, is also key for reducing the mismatch between vacancies and potential apprentices. In 2022, the number of young adults between 20 and 34 years of age without any professional degree has increased to 2.9 million (BIBB, 2024[65]). In the context of mounting skilled labour shortages, it should be a key priority for policy makers and firms to expand initial and continuing VET opportunities to upskill young adults without a professional degree. The recently established guarantee for applicants that did not find an apprenticeship to obtain a place in a VET school (Ausbildungsgarantie) in combination with personalised counselling services is an important step forward but should be combined with strengthening foundational skills of potential apprentices. Allowing the use of English and expanding and better targeting language courses to the workplace can help raise participation in VET for applicants with language issues. These efforts can build on positive experiences during the refugee crisis in 2015 and 2016. Strengthening foundational skills should also be one key focus for reforming the current VET transition system (Übergangsbereich), which supports young adults who have not succeeded in finding a VET position in a firm on their own. So far, several federal and state-level programmes coexist, with a lack of coordination, systematic information, and guidance services, and foundational skill acquisition is not a focus in many Laender (Enquete-Kommission Berufliche Bildung, 2021[66]). On-the-job training also needs to be strengthened in the transition system. An internship programme subsidised by the federal employment agency proved to be successful in matching VET applicants with employers and should be expanded (BIBB, 2022[67]).
3.4.2. Improving adult learning policies
About 15% of all workers have low foundational skills as they have neither completed upper secondary nor any vocational education, hindering their adjustment to changing skill demands during the green and digital transition (OECD, 2022[68]). They are less likely than other workers to participate in Continued Vocational Education and Training (CVET) programmes, which shows the need to expand, better promote and target adult education programmes for acquiring foundational skills. Employers and employer associations should play a larger role in promoting adult education opportunities by providing workers with sufficient training time and supporting efforts to raise awareness and disseminate information on adult education opportunities among low-skilled workers. The recent introduction of wage compensation to improve training opportunities for workers at high risk of job loss due to structural change is welcome. In addition, existing funding schemes for adults to complete basic or vocational education degrees could be expanded to also include non-formal learning and reskilling. Plans to introduce Individual Learning Accounts (ILAs), which provide cumulative training entitlements for individuals to choose among available adult learning courses, are welcome. However, reducing information asymmetries by establishing harmonised quality standards and certification for training courses is key for a successful implementation (see below). Additional funding programmes at the Laender level should be connected to the planned ILAs platform, possibly as available top-up to the federal funding.
Another key policy lever to promote participation in vocational training, particularly for low-skilled workers without a professional degree, is to rely more on partial qualifications and combine this with better recognition of prior learning, particularly of knowledge accumulated on the job. Partial qualifications allow individuals to complete training modules on a step-by-step basis, providing more flexibility for workers and firms. Coupled with recognition of prior learning, this could significantly reduce entry costs, shorten training times and encourage low-skilled workers to participate in CVET and eventually complete a VET degree (OECD, 2021[50]). So far, partial qualifications only exist for certain occupations, are not standardised across training providers, and not well linked to career guidance or the existing skill validation system. Implementing nationwide quality standards in career guidance, skill validation and partial qualifications and setting precise qualification requirements for career guidance counsellors in calls for tender would improve the services to workers with low skills (OECD, 2022[68]). A new legal framework came into force in January 2025 to facilitate skill validation and certification by business chambers, which should support the upscaling of the skill validation system. Importantly, partial qualifications should also be accessible for low-skilled adults below 25 years of age, as this would facilitate the completion of a VET degree for young adults without any professional degree. In parallel to expanding partial qualifications, the recently introduced possibility to complete a full three-year VET programme while receiving basic income support is an important step forward and should be maintained.
The fragmented nature of the CVET system and a lack of harmonised quality standards and certification creates information asymmetries hampering training participation and weighs on training quality. Fragmentation is related to complex governance structures and overlapping responsibilities across ministries and levels of government that hinder coordination. While the federal government is responsible for active labour market policies and CVET outside schools, the Laender are responsible for school-based CVET and local adult learning initiatives. Social partners also play an important role in advising the federal and Laender governments and are responsible for certain aspects of regulation. Since 2019, the National Skills Strategy has started to improve collaboration among key stakeholders, but a standardised quality certification system that sets clear benchmarks for course content, teaching quality, and learning outcomes still does not exist. Developing a unified CVET law could help consolidate the regulatory framework, define clear responsibilities, and set minimum quality standards. A centralised information platform has been established recently by the Ministry of Labour and Social Affairs to better match local course providers and workers looking for training by providing information on course content, changing skill needs in the labour market as well as funding options for training. However, as standardised quality certifications for CVET, which are under the responsibility of the Ministry of Education and Science, are still missing, comparability of courses is still limited. Improving coordination between active labour market and adult learning policies should be a policy priority at the federal and Laender level. In this context, the Federal Employment Agency's nationwide training and career counselling services as well as existing quality certifications for publicly funded courses could also be leveraged more to foster training participation of workers, improve training quality and better match local providers and training content (SVR, 2022[57]).
3.4.3. Improving the quality of early-childhood and basic education
Improving educational outcomes is of particular importance for addressing skilled labour shortages and raising economic growth in the longer term, including at the regional level (Hanushek, Ruhose and Woessmann, 2017[69]). According to the OECD PISA study, average learning outcomes of 15-year-old students have strongly deteriorated from 2018 to 2022 and educational inequality remains high (Figure 3.10). Low foundational skills are one of the main reasons why about three million young adults have no professional degree, while at the same time skilled labour shortages are high (see above). To improve learning outcomes, it is key to raise the quality of early-childhood education (Heckman and Mosso, 2014[70]). High quality education at an early age fosters the acquisition of language, cognitive, social, and emotional skills and strengthens self-regulation and confidence for a smooth transition to primary school (OECD, 2024[71]). The benefits extend to long-term educational attainment, well-being, and earnings, particularly for children from disadvantaged backgrounds.
Enrolment in early childhood education of children between three and six years of age is relatively high with an enrolment rate of about 90%. However, the absence of mandatory high-quality pre-schooling focusing on the development of foundational skills, both cognitive, and social and emotional, is a concern, particularly for children from disadvantaged households. Hamburg has successfully experimented with using competence screening tests of four-year-old children to mandate a pre-school year for children with low language skills. Moreover, access to early-childhood education still needs to be improved for children from disadvantaged households. As information and applications are not centralised within municipalities, applications are based on bilateral interviews and access costs are high in some Laender, access to child care services is particularly difficult for many disadvantaged households (Jessen, Schmitz and Waights, 2020[72]) (Hermes et al., 2021[73]). Raising subsidies for vulnerable households should be combined with centralising application procedures within municipalities and improving guidance services (see Box 3.1).
Extending the primary school day beyond the early afternoon to allow for more hours of teaching foundation skills could help improve learning outcomes and reduce the need for childcare during these hours. Hamburg has introduced a stronger focus on teaching foundational skills in primary school, while increasing the length of the school day and using frequent student performance tests to provide additional teaching support to classes with low outcomes. This in combination with introducing a mandatory pre-school year for children with low language skills has improved learning outcomes of children from disadvantaged households and raised average student performance (Stanat et al., 2023[74]). Establishing a close cooperation with teacher and parent associations has also been essential to build consensus around the reforms. The German government is providing EUR 3 billion to the Laender by 2027 to expand all-day education and care for primary school children, as a legal entitlement to all-day education and care was introduced in 2021. While this initiative is welcome, overall funding is insufficient and needs to be complemented by additional funding from the Laender, particularly to attract and employ more teachers and ensure that a longer school day is used for additional learning activities. Severe labour shortages in early-childhood and basic education should be addressed by improving recruitment and training, and raising salaries (Bock-Famulla et al., 2022[38]). Facilitating the recognition of foreign qualifications can help recruit more personnel trained abroad (see above).
Strengthening peer learning across the Laender is key to improve education policies. The federal government together with the Laender have dedicated EUR 20 billion during the next 10 years to improve educational quality in about 4 000 disadvantaged schools. While this is welcome, this initiative should be complemented with a comprehensive evaluation of learning deficits and education policy tools across the Laender to foster peer learning and improve the quality of education. Education policy is under the responsibility of the Laender, which leads to a wide heterogeneity in education policy design and learning outcomes. Allowing for linking and analysing data on learning outcomes of students across the Laender would help to foster peer learning and realise the benefits of the decentralised education system. Moreover, coordination with municipalities needs to improve. While the Laender are responsible for the remuneration of teachers, municipalities are responsible for the remuneration of teaching and psychological assistants, as well as the provision and maintenance of educational infrastructure (see Chapter 4).
Note: The Programme for International Student Assessment (PISA) assesses the knowledge and skills of 15-year-old students in mathematics, reading and science. The tests explore how well students can solve complex problems, think critically and communicate effectively. This gives insights into how well education systems are preparing students for real life challenges and future success. Advantaged students are students from households in the upper quartile of the PISA index of economic, social and cultural status, while disadvantaged students are from households in the lowest quartile.
Source: OECD (2023), PISA 2022 Results (Volume I): The State of Learning and Equity in Education, PISA, OECD Publishing, Paris, https://doi.org/10.1787/53f23881-en.
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