The Earned Income Tax Credit
An Economic Analysis and Lessons for Germany
©2002
Diplomarbeit
77 Seiten
Zusammenfassung
Inhaltsangabe:Einleitung:
Die aktuelle Debatte um das Mainzer Kombilohnmodell und der Wahlkampf in 2002 haben die Diskussion um die Arbeitsmarktpolitik an der Schnittstelle zur Sozialpolitik wiederbelebt. Wie schon seit langem kommt in dieser Diskussion auch das Bedürfnis nach Vergleichen mit anderen Ländern auf. Und in der Tat ist es sinnvoll, bestimmte Programme des Auslandes auf die Übertragbarkeit in Deutschland zu überprüfen.
Die vorliegende Arbeit befasst sich mit dem Earned Income Tax Credit (EITC) in den USA, und versucht diese kleine negative Einkommensteuer als Modell auf Deutschland zu übertragen. Dieses Programm ist von Forschern und politischen Parteien (siehe SPD, CDU, FDP) in verschiedenen offiziellen und inoffiziellen Thesenpapieren oft als mögliches Vorbild thematisiert worden. In der Arbeit werden deshalb folgende Fragen diskutiert:
Welche institutionellen Unterschiede gibt es zwischen den USA und Deutschland?
Wie funktioniert der Earned Income Tax Credit in den USA?
Ist der EITC auf Deutschland übertragbar?
Welche ökonomischen Effekte lassen sich theoretisch für die Arbeitsnachfrage und für das Arbeitsangebot identifizieren?
Was bedeuten die verschiedenen Varianten wie Bürgergeld, Kombilohn und EITC für den betroffenen Arbeitslosen im Hinblick auf sein Einkommen?
Wieviel würde die Einführung eines EITC in Deutschland kosten?
Welche polit-ökonomischen Restriktionen bzw. Konsequenzen sind zu erwarten?
Die Arbeit geht über die tagespolitische Diskussion hinaus und versucht in den angesprochenen Problemfeldern allgemeine Aspekte ökonomisch zu diskutieren. Die Arbeit ist in Englisch verfasst.
Inhaltsverzeichnis:Table of Contents:
LIST OF FIGURES4
LIST OF TABLES5
ABBREVIATIONS6
1.Introduction7
2.Economic performance, labor market institutions and reform proposals for Germany9
2.1Economic performance and labor market outcomes in Germany and the USA9
2.2Institutional arrangements in Germany and the United States11
2.2.1Labor market regulation12
2.2.2Welfare policies13
2.2.3The wage structure14
2.3Reform proposals for the low-wage sector in Germany16
3.The Earned Income Tax Credit18
3.1History and political context18
3.2The design of the Earned Income Tax Credit19
3.3Economic analysis of the EITC22
3.3.1General remarks22
3.3.2Labor supply effects22
3.3.3The advanced payment option and labor supply effects25
3.3.4Interactions with other transfer programs26
3.3.5Administrative […]
Die aktuelle Debatte um das Mainzer Kombilohnmodell und der Wahlkampf in 2002 haben die Diskussion um die Arbeitsmarktpolitik an der Schnittstelle zur Sozialpolitik wiederbelebt. Wie schon seit langem kommt in dieser Diskussion auch das Bedürfnis nach Vergleichen mit anderen Ländern auf. Und in der Tat ist es sinnvoll, bestimmte Programme des Auslandes auf die Übertragbarkeit in Deutschland zu überprüfen.
Die vorliegende Arbeit befasst sich mit dem Earned Income Tax Credit (EITC) in den USA, und versucht diese kleine negative Einkommensteuer als Modell auf Deutschland zu übertragen. Dieses Programm ist von Forschern und politischen Parteien (siehe SPD, CDU, FDP) in verschiedenen offiziellen und inoffiziellen Thesenpapieren oft als mögliches Vorbild thematisiert worden. In der Arbeit werden deshalb folgende Fragen diskutiert:
Welche institutionellen Unterschiede gibt es zwischen den USA und Deutschland?
Wie funktioniert der Earned Income Tax Credit in den USA?
Ist der EITC auf Deutschland übertragbar?
Welche ökonomischen Effekte lassen sich theoretisch für die Arbeitsnachfrage und für das Arbeitsangebot identifizieren?
Was bedeuten die verschiedenen Varianten wie Bürgergeld, Kombilohn und EITC für den betroffenen Arbeitslosen im Hinblick auf sein Einkommen?
Wieviel würde die Einführung eines EITC in Deutschland kosten?
Welche polit-ökonomischen Restriktionen bzw. Konsequenzen sind zu erwarten?
Die Arbeit geht über die tagespolitische Diskussion hinaus und versucht in den angesprochenen Problemfeldern allgemeine Aspekte ökonomisch zu diskutieren. Die Arbeit ist in Englisch verfasst.
Inhaltsverzeichnis:Table of Contents:
LIST OF FIGURES4
LIST OF TABLES5
ABBREVIATIONS6
1.Introduction7
2.Economic performance, labor market institutions and reform proposals for Germany9
2.1Economic performance and labor market outcomes in Germany and the USA9
2.2Institutional arrangements in Germany and the United States11
2.2.1Labor market regulation12
2.2.2Welfare policies13
2.2.3The wage structure14
2.3Reform proposals for the low-wage sector in Germany16
3.The Earned Income Tax Credit18
3.1History and political context18
3.2The design of the Earned Income Tax Credit19
3.3Economic analysis of the EITC22
3.3.1General remarks22
3.3.2Labor supply effects22
3.3.3The advanced payment option and labor supply effects25
3.3.4Interactions with other transfer programs26
3.3.5Administrative […]
Leseprobe
Inhaltsverzeichnis
ID 5500
Kilpper, Michael: The Earned Income Tax Credit: An Economic Analysis and Lessons for
Germany / Michael Kilpper - Hamburg: Diplomica GmbH, 2002
Zugl.: Berlin, Universität, Diplomarbeit, 2002
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2
T
ABLE OF
C
ONTENT
L
IST OF
F
IGURES
... 4
L
IST OF
T
ABLES
... 5
A
BBREVIATIONS
... 6
1. Introduction... 7
2. Economic performance, labor market institutions and reform proposals for Germany... 9
2.1 Economic performance and labor market outcomes in Germany and the USA ... 9
2.2 Institutional arrangements in Germany and the United States... 11
2.2.1 Labor market regulation... 12
2.2.2 Welfare policies ... 13
2.2.3 The wage structure ... 14
2.3 Reform proposals for the low-wage sector in Germany ... 16
3. The Earned Income Tax Credit... 18
3.1 History and political context ... 18
3.2 The design of the Earned Income Tax Credit ... 19
3.3 Economic analysis of the EITC... 22
3.3.1 General remarks ... 22
3.3.2 Labor supply effects... 22
3.3.3 The "advanced payment option" and labor supply effects... 25
3.3.4 Interactions with other transfer programs ... 26
3.3.5 Administrative aspects ... 27
3.3.6 Anti-poverty effectiveness ... 27
3.3.7 Marriage penalty ... 28
4. Is an EITC feasible for Germany? ... 29
4.1 A possible German EITC... 29
4.2 Economic effects... 31
4.2.1 Static labor supply... 31
4.2.2 Static labor demand and labor market equilibrium... 35
3
4.2.3 Other economic effects ... 41
4.2.4 Effectiveness and efficiency ... 42
4.3 EITC with changes in institutional conditions... 43
4.3.1 Changes in welfare policies ... 44
4.3.2 Wage differentiation... 45
4.4 Comparison of proposed subsidy programs in Germany... 45
4.4.1 Main differences in design... 45
4.3.3 Comparison of individual calculations... 46
4.5 Estimation of effects ... 50
5. The EITC from the Perspective of Political Economics ... 55
5.1 Interest groups... 55
5.1.1 Unions ... 55
5.1.2 Employers' associations... 57
5.2 The Politicians' Perspective... 57
6. Conclusion ... 60
A
PPENDIX
I ... 64
A
PPENDIX
II ... 66
A
PPENDIX
III... 68
R
EFERENCES
... 70
4
L
IST OF
F
IGURES
Figure 1: AFDC/TANF and EITC expenditures 1975-1997
19
Figure 2: EITC provisions: a graphical representation
21
Figure 3: EITC and static labor supply: the classical framework
23
Figure 4: Labor supply income and substitution effects
24
Figure 5: A graphical representation of the German EITC
30
Figure 6: Budget constraints with ,,Sozialhilfe" and EITC
32
Figure 7: Labor market effects for low-wage workers
36
Figure 8: Wage subsidies two models
64
Figure 9: ,,Sozialhilfe" and NIT
64
5
L
IST OF
T
ABLES
Table 1: Economic performance and the labor market in Germany and the U.S.
10
Table 2: Labor market institutions in Germany and the United States
12
Table 3: The Earned Income Tax Credit Provisions in 1999
20
Table 4: Comparison of models
47
Table 5: Different EITC alternatives
49
Table 6: Aggregate costs of an EITC in Germany
52
Table
I.1:
Program
overview
65
Table II.1: Social assistance in the U.S. and Germany
66
Table II.2: Social assistance households in Germany
67
Table III.1: Monthly gross income and EITC benefits
68
Table
III.2:
EITC
II
69
6
A
BBREVIATIONS
ABM
Arbeitsbeschaffungsmassnahme
AFDC
Aid for Families with Dependent Children
BMF
Bundesministerium für Finanzen
CDU/CSU
Christlich Demokratische Union / Christlich Soziale Union
EITC
Earned Income Tax Credit
FES
Friedrich-Ebert-Stiftung
FS
Food
Stamps
IRS
Internal Revenue Service
IZA
Institut für die Zukunft der Arbeit
MM
Mainzer
Modell
NIT
Negative Income Tax
OECD
Organization for Economic Co-operation and Development
SAM
Strukturanpassungsmassnahme
SOHI
,,Sozialhilfe" / Social assistance in Germany
SPD
Sozialdemokratische Partei Deutschlands
SSI
Supplemental Security Income
TANF
Temporary Assistance for Needy Families
WSI
Wirtschafts- und Sozialwissenschaftliches Institut (Hans-Böckler-Stiftung)
7
1. Introduction
Helping the poor is a difficult task. Low benefits might ethically be problematic and can
contribute to a weakened social cohesion in society. High benefits imply high costs and
possibly the problem of a poverty trap since disincentives make the transition from welfare to
work and self-responsibility less likely. But not only this problem might cause concerns.
Low-income families face financial difficulties, too, and may end up in poverty if no
assistance is available. Finally, many countries face high unemployment, possibly caused by
market rigidities and lacking incentives for search behavior and acceptance of lower paid
jobs.
In Germany, unemployment is high and the discussion on labor market policies, subsidies
and incentive schemes is again on the political agenda. Many proposals have been made over
the years and recently new measures have been implemented. Yet, the problem remains. It is
against this background that a look at the policies in other countries often becomes a hopeful
promise especially if they are successful. In the United States, different social assistance
and welfare programs are used to help poor and low-income citizens. For nearly 25 years, the
U.S. has had the Earned Income Tax Credit (EITC), a program which is unusual since it is
administered through the tax system and gives credit only to people who are working. It is
thus a non-traditional welfare program. In recent years, as concerns about welfare programs
have been rising, the EITC has experienced major expansions while other programs have
been altered and reduced significantly.
1
In Germany, however, the means-tested basic social
assistance program (,,Sozialhilfe") for poor and low-income citizens has experienced little
change since its funding. Recent discussions on wage subsidies have again made clear that
the German labor market needs reform. It is unclear however, which direction has to be
taken. In this work, it is asked if an EITC could be implemented in Germany. The hypothesis
associated with this question is, that - despite institutional differences - an EITC might not
only be a possible but also a very sensible program for Germany in order to solve its labor
market problems.
1
TANF followed Aid for Families with Dependent Children in 1996. Public spending for the EITC exceeded
costs of TANF/AFDC in 1996, indirectly showing a shift in policy priorities.
8
This idea namely to introduce an EITC in Germany has recently been proposed by
scientists and politicians alike. For example, Hans-Werner Sinn has argued for a German
EITC in January 2001.
2
A SPD-friendly association of managers has argued in favor of such
a scheme. And finally, the CDU has argued for testing the EITC as a potential incentive
program in a discussion paper called "The New Social Market Economy".
3
It is therefore not
only an academic exercise but potentially also relevant for policymakers to get a better
understanding of the EITC and its advantages and disadvantages if it were introduced in
Germany.
Methodologically, mainly classical economic concepts are used for the evaluation of
arguments. The focus lies on labor market policies, therefore static labor supply and static
labor demand models are focused on. Extensions are included if additional insight arises
from them. The models are introduced in the relevant chapters and sections.
In the following, the hypothesis will be addressed in more detail. After briefly describing the
economic situation and the labor markets in both the United States and Germany (Chapter
II), it will be explained how the EITC functions and how it has been evaluated (Chapter III).
In this discussion, it is drawn on descriptive statistics and existing research. In Chapter IV,
the potential effects of an EITC in Germany will be discussed. First, a proposal is developed
from existing examples, then the EITC is analyzed with respect to labor supply and labor
demand effects. It is compared to other reform options currently discussed in Germany, both
with respect to design as well as with respect to individual income effects. Then potential
aggregate effects of the EITC are estimated using calculations from other studies. This,
however, can only be seen as first approximation since no econometric calculations are
included. Next, a short discussion of the EITC from the perspective of Political Economy in
Chapter V follows. It is questioned if the EITC could be implemented and what effects it has
on interest groups and politicians. Finally, the conclusion summarizes the findings and
includes some normative remarks on possible future developments (Chapter VI).
2
See ifo-Standpunkt Nr. 21, http://www.cesifo.de/orcl/dbssi/stp021.htm
3
See Managerkreis (2002), p. 41 and CDU (2001), p. 21.
9
2.
Economic performance, labor market institutions and
reform proposals for Germany
Differences in the overall economic situation and in the structure of labor markets between
Germany and the United States have to be taken into account if an analysis of welfare and
anti-poverty policies is to be effective. This is especially true since the analysis focuses on
the transition from welfare to work. However, the comparison of the economic situation as
well as the labor markets presented herein is certainly not exhaustive. Still, it reveals some
important aspects, which should be considered in the discussion on welfare reform policies.
Since the focus lies on Germany and its economic problems, different reform proposals for
Germany are presented at the end of the chapter.
2.1 Economic performance and labor market outcomes in Germany
and the USA
How have both, the United States and Germany, performed during the last 10 years? As can
be seen in Table 1, Germany had lower GDP growth rates than the United States during the
period of 1991 to 2000. Standardized rates show that Germany faces an unemployment
problem, being twice as high as in the United States. Furthermore, employment increases due
to GDP growth are very small in Germany compared to the U.S. Additionally, the level of
long-term unemployment accounts for 37.1% of all unemployed Germans in 1999.
4
Germany's economy is generally considered to be strong but facing major challenges.
5
Not
only reunification plays a role in this discussion, since structural reforms are demanded.
6
It is
argued that the U.S. might be partially an example to follow because in Germany the
performance has been weaker during the time of the U.S. economic expansion. As discussed
above, many parameters seem to suggest that Germany has not performed well over the last
years. GDP per capita is significantly lower. Few jobs have been created in Germany
compared to the overall success of the U.S. labor market. And especially the low growth and
employment relation gives rise to concerns. It is therefore interesting to see how the U.S. has
4
See IW Köln (2001a), p. 69.
5
See OECD (2001c), p. 9.
6
See Sachverständigenrat (2001), p. 191.
10
performed in the recent past. During the last decade, the U.S. was experiencing the longest
period of peacetime growth with a prospering economy that was stronger than ever before.
Some comments speak of a "virtuous circle", consisting of low inflation, steadily growing
employment and consumption.
7
Moreover, due to high tax revenues, the U.S. Government
was in the comfortable situation of having a budget surplus in 1998 of nearly $ 63 billions.
Yet, the U.S. has faced a recession in 2001 but there are signs that this could change soon.
8
T A B L E 1
Economic performance and the labor market
in Germany and the United States
57.6
46.1
Low-qualified
6
6.0
37.1
Long-term unempl.(2000)
5
4.0
8.1
Unemployment rate (2000)
4
0.4
0.04
Growth and employment
relation (1990-1999)
3
3.2
1.9
Average GDP growth (1991-
2000)
2
31,910
23,510
GDP per capita (1999)
1
USA
Germany
1
In purchasing-power parities (US-$). Source: IW Köln (2001a), p.33.
2
In %. Source: WSI (2001), p. 353.
3
An 1% change in real GDP leads to a change of employment in...%. Source: IW Köln (2001a), p. 60.
4
Standardised Unemployment Rates (in %). Source: OECD (2001a and b).
5
In % of total unemployment. For West Germany: Statistisches Bundesamt (2001); US: Source: IW Köln (2001a), p. 69.
6
Low-qualified employees in % of low-qualified labor force potential between age 25 and 64; See Klös (2000), p. 10.
Still, over the last 20 years, nearly 29 million new jobs have been created, forcing
unemployment down to 4.9% in 1997.
9
In May 1998, the unemployment rate dropped to
4.3%, a 28-year-low.
10
Analysis shows that the enormous job growth in the U.S. has taken
place in the service sector, led by low-paid jobs in "eating and drinking places", grocery
stores and "miscellaneous business services."
11
But this is only partly true. Jobs for high-
skilled professionals in the computer industry have been growing fast, too. The same applies
for health care related employment, although this includes both types of employment, low-
7
See IFO Schnelldienst 22 (1998).
8
See OECD (2001b), p. 24.
9
Statistical Abstract of the United States 1998, see Bureau of the Census (1998).
10
See Economic Report of the President (2001), p. 4.
11
See Leutenecker (1998), pp. 84-86.
11
and high-skilled.
12
Despite this positive development in the U.S. there have been negative
effects namely growing income inequality and poverty. Liebman (1998) shows that from
1976 to 1996 the lowest fifth of American households had to face a decreasing share of the
overall annual income while the highest fifth experienced a rise from 43 % to 49 %.
13
Others,
like David Ellwood (2000), point out both the higher wage inequality and the sharp decline in
household income for families with children in the bottom third. Overall poverty rates fell
from 13.7% in 1996 to 13.3% in 1997, but still remain at high level when the overall success
of the U.S. economy is taken into account.
14
2.2 Institutional arrangements in Germany and The United States
In order to understand the economic developments, institutional arrangements as well as
special circumstances have to be considered. One reason for Germany's labor market
problems might be found in the historical fact and process of reunification.
15
Another
argument concerns the fact that Germany has a smaller service sector than the United
States.
16
Yet, what seems to matter most, are the institutions that interfere with the labor market. It is
well-known that Germany has more and stronger regulations protecting workers (i.e. the
protection against dismissal) than most other countries, especially the United States.
17
Moreover, there are concerns about the work incentives of high unemployment and social
assistance benefits. Finally, the system of centralized wage bargaining and the wage structure
have been in discussion for quite some time.
18
As an overview, Table 2 lists selected
institutional differences between Germany and the U.S.
12
For a detailed discussion about the service industry, see Meisenheimer (1998), pp. 23-25.
13
See Liebman (1998), p. 96.
14
See Economic Report of the President (1998).
15
For a description of the influence of reunification on the German labor market, see Lindlar (1998), pp. 592-
593.
16
Some studies suggest that this must not necessarily be true if the concrete areas of employment are compared
(instead of sectors). For instance, as outsourcing is less common in Germany, some statistics include service
jobs in the numbers for the manufacturing sector in Germany while showing them appropriately for the US. See
Wiethold (1998), p. 29.
17
See IW Köln (2001a), p. 68.
18
Additionally, the tax system and the social security system as a whole are more and more perceived as
problematic in their current structure.
12
T A B L E 2
Labor market institutions in Germany and the United States
18
86
Union coverage
4
4.2
2.3
Wage differentiation
6
US-$ 5.15
Set in collective bargaining
negotiations
Minimum wage
5
·Limited to 2 subsequent
years, 5 years per lifetime
· Benefits differ by state
· Strong sanctions
· Unlimited
· Relatively high benefits
· Moderate sanctions
Social assistance
3
Up to 6 months
Up to 32 months
Unemployment insurance
2
0.7
2.6
Labor market regulation
1
USA
Germany
1
Indexed: 0=no regulation, 6=very restrictive. Source: IW Köln (2001a), p. 68.
2
Source: OECD (1998).
3
Source: Peter (2001).
4
In %of total employed. U.S.: 1994 data OECD Employment Outlook (1997b). West Germany: 1999, IW Köln (2001c).
5
Source: Peter (2001).
6
Measured by D9/D1 between 1989 and 1995. Source: Freeman/Schettkat (2000) using OECD definitions. See
Footnote # 27, p. 14.
Of course, standard macro-economic theory suggests, that labor markets are not independent
of goods markets. A very practical illustration of this fact is the current downturn in the
United States. Though no institutional constraints have changed, unemployment has risen in
2001. Obviously, the recession and sluggish goods demand have effects on employment.
From this point of view it is clear that other parameters do indeed play an important role in
explaining the U.S. success during the period 1991 to 2000. Some authors point towards the
low saving rate of American households and their affinity to consumption.
19
Others, such as
Richard Freeman (2000b), point out the effects of immigration, the rise in female labor
supply, the start-up mentality and the effects of the trade deficit (the last being considered to
be a problem). In fact, many aspects do play a role. Yet, the focus in this work will solely
remain on institutions and micro-foundations.
2.2.1 Labor market regulation
Labor market regulation is considered to be more restrictive in Germany than in the U.S.
Especially, restrictions for worker dismissal are stronger in Germany than in the United
States. Additionally, the strictness of working time regulations and the regulation of limited-
19
See Bosch et al. (2000), p. 76.
13
time contracts is much stronger in Germany as has been discussed often by scientists.
20
Researchers question whether too much regulation in this area might lead to a lower
probability of the unemployed to re-enter the job market. This problem arises if employers
have to bear high costs associated with dismissals and therefore do not employ in the first
place or simply use overtime work to substitute for new employees.
21
Moreover, more
flexibility seems to be necessary for the age of globalization in which lifetime relationships
become more and more obsolete.
22
2.2.2 Welfare
policies
Welfare policies influence labor supply decisions and therefore have to be considered in
more detail. The American safety net for non-disabled and non-elderly people can be
described as a four-pillar system. Temporary Assistance for Needy Families (TANF), which
repealed Aid to Families with Dependent Children (AFDC), the Food Stamps program,
Medicaid and finally the Earned Income Tax Credit (EITC). TANF was the result of welfare
reform in 1996. With the Personal Responsibility and Work Opportunity Reconciliation Act,
enacted on August 22, 1996, TANF replaced AFDC and dramatically changed the nature of
basic social assistance in the United States. The act ended the general benefit entitlement of
needy families and put into place a program that, by giving more power to the states, looks
totally different from its predecessor. Now states set the rules and benefit levels though some
federal obligations still exist. After two years, recipients are required to work and the overall
maximum period of receiving benefits is limited to 5 years.
23
It should be mentioned that
benefits normally only go to single parents with children (implying that it mainly is a
program for single mothers). In contrast, food stamps can be received by every single person
or household that meets the program's income requirements. It is designed to help people
who do not have the purchasing power to buy enough food, for which it is assumed that
households spend 30 % of their income. Medicaid provides health benefits, especially for
TANF recipients and their children. Finally, the unemployment insurance in the United
States plays only a limited role. It is normally restricted to 6 months and its benefit level is
20
See Burda and Wyplosz (2001), pp. 428 429.
21
For a short discussion, see Franz (1999), p. 216.
22
See Burda and Wyplosz (2001), p. 429.
23
See Peter (2001), p. 6.
14
relatively low. Overall, the reform of the U.S. welfare system has lead to a significant decline
in welfare rolls.
24
In Germany, welfare policies look different. Social assistance, the so-called ,,Sozialhilfe", is
the bottommost safety net, integrated in a system of higher ranking social insurance programs
(i.e. pension, health and accident) as an additional pillar for those who are not eligible for
contributions from other welfare programs.
25
Social assistance helps all eligible persons and
is not limited to German citizens. This program defines a certain minimum income
depending on the number of household members which is guaranteed to everyone meeting
the criteria. Thus, poverty does not exist. It is avoided qua definitionem.
26
If recipients who
are required to work reject job offers, benefits will be cut. In addition, sometimes as
complements to social assistance, unemployment insurance benefits and unemployment
assistance are granted. Unemployment benefits can be paid up to 32 months and depend on
former income. Other programs exist but will not be of further interest since they do not
amount to the same high levels in overall benefits or they do not exhibit the relevant
incentives for the discussion in this work.
2.2.3 The wage structure
The wage structure in Germany is often described as more equal than the one in the United
States. Freeman and Schettkat (2000) find that between 1989 and 1995, the U.S. had a wage
dispersion of 4.2 against Germany with 2.3.
27
They also state that there are indeed more low-
wage service jobs in the U.S. than in Germany. Unionization and coverage is higher in
Germany than in the United States.
28
Additionally, while the U.S. have a minimum wage law
(5.15$), Germany has minimum wages set in collective bargaining, depending on regions and
sectors and generally considered to be relatively high. For example, a female florist in East
Germany receives DM 1,729 or 887 per month with 41 working hours a week. A
24
See Peter (2001), p. 13.
25
The following description is based on information provided by the Bundesministerium für Arbeit und
Soziales (Federal Ministry of Labor and Social Affairs, 2001b), p. 2.
26
One can think of the existence minimum being the equivalent of the U.S. poverty thresholds. If the concept
of relative poverty were applied, the poverty rate in Germany would be 9.1% in 1994 compared to 17.1 %
(1995) in the United States. Poverty = 50% of median income and below; see OECD (1998).
27
Measured by D9/D1, which is the ratio of the income D9 (above which only 10% of the population earns
more) and D1, the maximum income achievable in the lowest income range. See Freeman and Schettkat (2000),
p. 22 and OECD (1997).
28
See OECD (1997).
15
convenience food specialist in the West earns from DM 3,008 ( 1,543) onwards.
29
With
respect to skill, nearly 38% of all unemployed have no finished job-related education in
Germany.
30
With respect to the wage structure in the U.S. there is some empirical evidence
that more people are employed in the low-wage sector which confirms the findings above.
For instance, the incidence of low pay shows that in the U.S. (1) 14% of full-time workers
work below 50% of median earnings, (2) 26% below 66% of median earnings and (3) 37%
below 80% of median earnings. Given the same income levels the respective numbers for
Germany are (1) 6%, (2) 13% and (3) 25%. Thus, the U.S. has wider earnings differentials.
31
For Germany, studies such as the one of the IW Köln (2001) show that many low-wage
groups in Germany lie approximately around 1,000 per month.
32
For a description of the
wage structure in Germany, it is necessary to include the so-called 630-DM-jobs (now
325), originally allowing people to work free of social security contributions and taxes until
they reach the monthly 325 limit. These jobs are roughly 20% cheaper per working hour
than regular jobs.
33
Analysts estimate that between 1.6 and 4.6 million of such jobs exist with
around one third of the employees holding these jobs in addition to other employment.
34
In
its earlier state, employers had to pay a lump sum tax on these 325 jobs. The German
government abolished this tax in 1999 and replaced it with social security contributions at the
same level as the former tax. Persons who hold more than one of these jobs or hold it
additionally to regular employment, have to pay taxes and contributions.
35
After the reform,
and in contrast to common wisdom, there are signs of increases in the number of jobs at this
level.
36
A question arising in this discussion on the German wage structure is the obvious gap
between 325 per month and approximately 1,000, where few jobs seem to exist. Below
wages of up to DM 16,800 yearly ( 8,615) only 22,193 full-time jobs are actually
occupied.
37
Three explanations are possible: first, although these wages exist, workers'
councils might oppose them and therefore try to place new employees in higher wage groups.
29
For wages see WSI (2001), p. 9 and 14.
30
See Statistisches Bundesamt (2001), p. 123.
31
See OECD (1997a). In general, labor costs, working hours and productivity differ between the two countries.
For data see IW Köln (2001a).
32
See IW Köln (2001), iw-trends 1/2001, p. 47.
33
See Wiethold (1998), p. 32.
34
See Riphan et al. (1999), p. 37.
35
See Bundesministerium für Arbeit und Soziales (2001a), p. 26.
36
A study by the IAB (2001), pp. 10-11, points out that nearly 400,000 more persons work in this low-wage
sector. However, this expansion might have been greater before the reform.
37
See Riphan et al. (1999), p. 33. Additionally, approximately 600,000 part-time jobs exist in this sector.
16
Second, unions might not allow for low-wage groups to exist in certain sectors or regions.
And third, social assistance payments might be too high and therefore increase the
reservation wage with the effect of a reduction of labor supply of low-qualified workers.
Most likely, all three effects work together and help create the observed job gap in the low-
wage sector. One final comment to this: the job gap becomes obvious if one considers the
fact that of the available vacancies nearly the half is related to low-wage service jobs as for
example in the gastronomy or security service sectors.
38
2.3 Reform proposals for the low-wage sector in Germany
Inspired by Milton Friedman's idea of a negative income tax (NIT) in the early sixties,
economists in Germany proposed similar ideas of an integration of tax and transfer system.
39
Today, there are several reform proposals in discussion, especially since Germany faces high
unemployment and has to deal with the rising pressure of globalization (i.e. increased
competition). In the following, a brief description of some reform ideas is presented.
First of all, the so-called "Bürgergeld" (citizen income scheme) should be mentioned. It was
proposed by Joachim Mitschke and has features similar to a NIT.
40
It proposes a combination
of all tax-financed transfers to one payment (citizen income) that should be administered by
one office (the tax administration) instead of many governmental offices in charge of the
different existing programs. It should be granted to every person meeting certain criteria.
However, in order to keep administrative costs low, the main criterion is a wealth test,
ensuring that payments do not go to rich citizens. The concrete amount should represent a
minimum income close to the definition already adopted in the current tax system. Instead of
deductibles, i.e., 50% of earned income is counted towards the benefit (citizen income).
Thus, without any income a single person would receive 600; if the person had earnings of
250, her citizen income would be reduced to 475, leaving her an overall income of 725.
A second model, and one which the German Government has enacted recently, is the so-
called "Mainzer Modell".
41
In this model, social insurance contributions for the employee are
partly subsidized, depending on income and family structure. For example, a single worker
38
See Klös (2000), p. 9.
39
See Friedman (1962). For an overview of some German models, see Becker (1995).
40
The following discussion is based on descriptions in Becker (1995) and Pelzer (1996).
41
See IW Köln (2002), p. 5.
Details
- Seiten
- Erscheinungsform
- Originalausgabe
- Jahr
- 2002
- ISBN (eBook)
- 9783832455002
- ISBN (Paperback)
- 9783838655000
- DOI
- 10.3239/9783832455002
- Dateigröße
- 831 KB
- Sprache
- Englisch
- Institution / Hochschule
- Humboldt-Universität zu Berlin – Wirtschaftswissenschaftliche Fakultät
- Erscheinungsdatum
- 2002 (Juni)
- Note
- 1,3
- Schlagworte
- kombilohn vorbild negative einkommenssteuer arbeitsmarktpolitik politische ökonomie arbeitsmarktes
