Economic reform and the political economy of the German welfare state

Abstract

The central problem of the German economy is the high costs of labour, driven up by the burden of funding an extensive welfare state through social insurance contributions that operate as payroll taxes on employment. The study identifies the political causes of the long-term rise in non-wage labour costs. It analyses the reforms of the last decade, showing how the multiplicity of veto points in the German political economy has weakened reform initiatives and reduced the prospect for effective reform in the foreseeable future.

Notes

1. See Herbert Kitschelt and Wolfgang Streeck, ‘From Stability to Stagnation: Germany at the Beginning of the Twenty-First Century’, in Herbert Kitschelt and Wolfgang Streeck (eds.), Germany: Beyond the Stable State (London: Frank Cass, 2004), pp.1–34.

2. Ibid., Table 3, p.15.

3. See AmCham Germany and Boston Consulting Group, AmCham Business Questionnaire 2003 (Berlin: AmCham Germany and Boston Consulting Group Deutschland, 2003), http://www.dialogzukunft.de/de/data/pdf/amcham_wirtschaftsstandort_deutschland.pdf (accessed 6 Dec. 2004); Sigurt Vitols, Unternehmensführung und Arbeitsbeziehungen in deutschen Tochtergesellschaften großer ausländischer Unternehmen. Studie des Forums Mitbestimmung im Auftrag der Bertelsmann Stiftung und der Hans-Böckler-Stiftung (Gütersloh: Bertelsmann Stiftung, 2001).

4. See Jörn Kleinert, Axel Schimmelpfennig, Klaus Schrader and Jürgen Stehn, Globalisierung, Strukturwandel und Beschäftigung, Kieler Studie 308 (Kiel: Mohr Siebeck, 2000), pp.71–7; for an overview of the effects of globalisation on the German economy and labour market, see Deutscher Bundestag, Schlussbericht der Enquete-Kommission ‘Globalisierung der Weltwirtschaft – Herausforderungen und Antworten’, BT-Drks. 14/9200, http://www.dip.bundestag.de/btd/14/092/1409200.pdf (accessed 6 Dec. 2004).

5. Fritz W. Scharpf, ‘Employment and the Welfare State: A Continental Dilemma’, MPIfG Working Paper 97/7 (Köln: MPI für Gesellschaftsforschung, 1997), pp.9–10; Fritz W. Scharpf and Vivien A. Schmidt, ‘Conclusions’, in Fritz W. Scharpf and Vivien A. Schmidt, Welfare and Work in the Open Economy. Volume I. From Vulnerability to Competitiveness (Oxford: Oxford University Press, 2000), pp.310–15.

6. Bernhard Ebbinghaus, ‘Any Way Out of “Exit from Work”? Reversing the Entrenched Pathways of Early Retirement’, in Fritz W. Scharpf and Vivien A. Schmidt (eds.), Welfare and Work in the Open Economy. Volume II. Diverse Responses to Common Challenges (Oxford: Oxford University Press, 2000), pp.511–53; Bernhard Ebbinghaus, Reforming Early Retirement in Europe, Japan, and the USA (Oxford: Oxford University Press, forthcoming in 2006).

7. Statistisches Bundesamt, Durchschnittsalter der deutschen Studienanfänger und Absolventen nach Geschlecht 1980 bis 2000 (Wiesbaden, 2004), http://www.destatis.de/download/hoch/bild12_1.xls (accessed 6 Dec. 2004).

8. For a collection of comparative data on the German economy see Werner Eichhorst, Eric Thode and Frank Winter, Benchmarking Deutschland 2004: Arbeitsmarkt und Beschäftigung. Bericht der Bertelsmann Stiftung (Berlin etc.: Springer, 2004).

9. See Wolfgang Strengmann-Kuhn, Armut trotz Erwerbstätigkeit. Analysen und sozialpolitische Konsequenzen (Frankfurt am Main: Campus, 2003).

10. See Kitschelt and Streeck, ‘From Stability to Stagnation’, Table 1, p.11.

11. Ibid. For a comparative overview of the development of employment rates, social expenditures and non-wage labour costs, see Table 4, p.15.

12. Bernhard Ebbinghaus and Anke Hassel, ‘Striking Deals: Concertation in the Reform of Continental European Welfare States’, Journal of European Public Policy 7/1 (2000), p.46, Table 1.

13. Wolfgang Streeck, ‘From State Weakness as Strength to State Weakness as Weakness: Welfare Corporatism and the Private Use of the Public Interest’, MPIfG Working Paper 03/2 (Köln: MPI für Gesellschaftsforschung, 2002), p.8; also in Simon Green and William E. Paterson (eds.), Governance in Contemporary Germany. The Semisovereign State Revisited (Cambridge: Cambridge University Press, 2005).

14. Philip Manow and Eric Seils, ‘Adjusting Badly. The German Welfare State, Structural Change, and the Open Economy’, in Fritz W. Scharpf and Vivien A. Schmidt (eds.), Welfare and Work in the Open Economy. Volume II. Diverse Responses to Common Challenges (Oxford: Oxford University Press, 2000), p.265.

15. Karl Hinrichs, ‘Reforming the Public Sector Pension Scheme in Germany: The End of the Traditional Consensus’. Paper presented at the XIVth World Congress of Sociology, International Sociological Association, Research Committee 19, Session 3: ‘Reforming Public Pensions Schemes (I)’, Montreal, Canada, 26 July–1 August 1998, p.13; quoted in Steven Ney, ‘Pension Reform in Germany’, ICCR, The Interdisciplinary Centre for Comparative Research in the Social Sciences, 2001, http://www.iccr-international.org/publications/researchreports-spa.html (accessed 12 Dec. 2004), p.26.

16. Wolfgang Streeck and Anke Hassel, ‘The Crumbling Pillars of Social Partnership’, in Kitschelt and Streeck (eds.), Germany: Beyond the Stable State, pp.107–13.

17. Streeck, ‘From State Weakness’, p.13.

18. Anke Hassel, ‘Negotiating Wage Restraint: Europe's Response to a New Economic Environment’, Habilitationsschrift (Bochum: Sozialwissenschaftliche Fakultät der Ruhr-Universität Bochum, 2003), pp.216–18, http://imperia.iu-bremen.de/hss/ahassel/36168/index.shtml.

19. See Christine Trampusch, ‘Institutional Resettlement: The Case of Early Retirement in Germany’, in Wolfgang Streeck and Kathleen Thelen (eds.), Beyond Continuity: Explorations in the Dynamics of Advanced Political Economies (Oxford: Oxford University Press, 2005), pp.203–28.

20. Martin Kohli, Martin Rein, Anne-Marie Guillemard and Herman van Gunsteren (eds.), Time for Retirement. Comparative Studies of Early Exit from the Labour Force (Cambridge: Cambridge University Press, 1991), p.190.

21. Rainer George, Beschäftigung älterer Arbeitnehmer aus betrieblicher Sicht: Frühverrentung als Personalanpassungsstrategie in internen Arbeitsmärkten (München: Hampp, 2000); Isabela Mares, The Politics of Social Risk: Business and Welfare State Development (Cambridge: Cambridge University Press, 2003).

22. Christine Trampusch, ‘Ein Bündnis für die nachhaltige Finanzierung der Sozialversicherungssysteme: Interessenvermittlung in der deutschen Arbeitsmarkt- und Rentenpolitik’, MPIfG Discussion Paper 03/1 (Köln: Max-Planck-Institut für Gesellschaftsforschung, 2003), Table 5.

23. Martin Schludi, ‘The Reform of Bismarckian Pension Systems. A Comparison of Pension Politics in Austria, France, Germany, Italy and Sweden’, (Amsterdam: Amsterdam University Press, 2005), pp.141–143.

24. Stephan Leibfried and Herbert Obinger, ‘The State of the Welfare State: German Social Policy between Macroeconomic Retrenchment and Microeconomic Recalibration’, in Streeck and Kitschelt (eds.), Germany. Beyond the Stable State, p.200.

25. Schludi, The Reform, pp.143–144.

26. Stephen J. Silvia, ‘The Fall and Rise of Unemployment in Germany: Is the Red–Green Government Responsible?’, German Politics 11/1(2002), p.15.

27. Bertelsmann (Bertelsmann Stiftung), International Reform Monitor. Social Policy, Labour Market Policy and Industrial Relations. Today's Survey, April 2004, Government Proposal on a ‘Pension Reform 2000’, http://www.reformmonitor.org (accessed 18 April 2004), p.5.

28. Frank Bönker and Hellmut Wollmann, ‘Stumbling towards Reform’, in Peter Taylor-Gooby (ed.), Welfare States under Pressure (London: Sage, 2001), p.87.

29. Ibid., p.87.

30. FORSA, ‘Meinungen der Bürger zur Rentendiskussion’, 1999 (unpublished).

31. Leibfried and Obinger, ‘The State of the Welfare State’, p.213.

32. Streeck and Hassel, ‘The Crumbling Pillars of Social Partnership’, p.118.

33. German Council of Economic Experts, Consolidate Public Finances – Reform the Tax System. Annual Report 2003/2004, First Chapter (2003), p.31.

34. German News, 28 May 2003.

35. See Bundesministerium für Gesundheit und Soziale Sicherung, Nachhaltigkeit in der Finanzierung der sozialen Sicherungssysteme (Bundesministerium für Gesundheit und Soziale Sicherung: Berlin, 2003), http://www.arbeitnehmerkammer.de/sozialpolitik/doku/05_soziales/sgb_vi/berichte/2003_08_28_ruerup_lang.pdf (accessed 7 Dec. 2004).

36. Streeck, ‘From State Weakness’, pp.7–8.

37. Manow and Seils, ‘Adjusting Badly’, p.293.

38. Streeck, ‘From State Weakness’, p.8.

39. Wolfgang Streeck, ‘No Longer the Century of Corporatism. Das Ende des “Bündnisses für Arbeit”’, MPIfG Working Paper 03/4, Mai 2003 (Köln: MPI für Gesellschaftsforschung, 2003).

40. By law, any deficit in the unemployment insurance fund must be automatically covered by the federal government.

41. Streeck and Hassel, ‘The Crumbling Pillars’, p.119.

42. In 2004, this was enacted by the so-called ‘Hartz IV reform’, which we will discuss later. Until the reform, German unemployment assistance consisted of ‘unemployment benefit’ (Arbeitslosengeld), financed by contributions from workers and employers, and the means-tested ‘unemployment assistance’ (Arbeitslosenhilfe), which was financed by the federal budget. Unemployed workers generally drew Arbeitslosengeld first and only moved to Arbeitslosenhilfe if they continued to be unemployed after their eligibility for Arbeitslosengeld had expired (the so-called long-term unemployed). Arbeitslosengeld was paid for a period of up to 32 months, whereas Arbeitslosenhilfe was offered for an unlimited period. Unemployed persons who were not eligible for Arbeitslosengeld or Arbeitslosenhilfe could apply for social assistance (Sozialhilfe). Whereas Arbeitslosengeld and Arbeitslosenhilfe were administered by the Bundesagentur für Arbeit, Sozialhilfe was administered by the municipalities (Kommunen) and mainly financed by them.

43. Financial Times, 23 May 2003, p.8.

44. Ibid.

45. Ibid.

46. Bertelsmann Stiftung, International Reform Monitor. Social Policy, Labour Market Policy and Industrial Relations. Today's Survey, April 2004, Agenda 2010, http://www.reformmonitor.org (accessed 18 April 2004), p.3.

47. This is because of a transition period of 25 months. The shorter period of entitlement will fully apply to all those claiming unemployment benefit from February 2006 onwards.

48. Unlike social assistance (Sozialhilfe), unemployment assistance (Arbeitslosenhilfe) was income-related. Arbeitslosengeld II is no longer tied to a recipient's former income, but will be set approximately at the (flat-rate) level of what used to be social assistance (€345 per month in West Germany and €311 per month in East Germany). Arbeitslosengeld II is financed out of the federal budget.

49. German News, 17 Oct. 2003.

50. German Council of Economic Advisers, Annual Report 2004/05 ‘External Success – Internal Challenges’, Press Release, 17 Nov. 2004, http://www.sachverstaendigenrat-wirtschaft.de (accessed 22 Nov. 2004), p.2.

51. Frankfurter Allgemeine Zeitung, 16 Nov. 2004, p.12.

52. Ibid., 13 Nov. 2004, p.14.

53. Ibid., 11 Nov. 2004, p.15.

54. Ibid., 11 Nov. 2004, p.13.

55. Financial Times, 30 Jan. 2003, p.17.

56. OECD, Economic Surveys Germany, Vol.2002, Supplement No.4 – January 2003 (Paris, 2003), p.92.

57. Ibid., p. 92.

58. Ibid., p. 93.

59. Deutsches Ärzteblatt 101, 2 Feb. 2004, p.A-313.

60. OECD, Economic Surveys, p.96.

61. Leibfried and Obinger, ‘The State of the Welfare State’, p.212.

62. Unlike the other branches of the German social insurance system, the health insurance funds do not receive regular subsidies from the federal government. To cover a shortfall in their revenues, they are allowed within limits to incur debts.

63. Anja K. Hartmann, ‘Patientennah, leistungsstark, finanzbewusst? Die Gesundheitspolitik der rot-grünen Bundesregierung’, in Tobias Ostheim Christoph Egle and Reimut Zohlnhöfer (eds.), Das rot–grüne Projekt: Eine Bilanz der Regierung Schröder 1998–2002 (Wiesbaden: Westdeutscher Verlag, 2003), p.273.

64. OECD, Economic Surveys, p.93.

65. Hartmann, ‘Patientennah’, p.276.

66. German Council of Economic Experts, Consolidate Public Finances, p.30.

67. Bertelsmann Stiftung, International Reform Monitor. Social Policy, Labour Market Policy and Industrial Relations. Today's Survey, April 2004, Comprehensive Health Care Reform, http://www.reformmonitor.org (accessed 18 April 2004), p.3.

68. Upward pressure on contribution rates comes also from economic activity moving underground, depriving the social insurance system of revenue, and from the current rapid displacement of conventional employment by so-called ‘mini jobs’. Mini jobs are low-wage jobs with significantly reduced social insurance contributions, introduced in the course of the Hartz reforms to facilitate employment especially in the service sector. They are an example of how a supposed solution to a problem can in fact aggravate it.

69. Thus taking effect at the beginning of 2004, the top income tax rate was once more lowered while co-insurance payments for low-income patients were raised.

70. Bundesverband Deutscher Banken, Inter/esse: Informationen, Daten, Hintergründe 11/2004, http://www.bankenverband.de/pic/artikelpic/112004/IE112004.pdf (accessed 13 Dec. 2004), pp.2, 6. Another example of how bizarre the German debate has become is the story of the CDU Kopfpauschale. The proposal was immediately attacked by the government as unfair as it would make ‘the Generaldirektor and his secretary’ pay the same monthly insurance premium. The attack was much in line with public sentiment, which almost immediately rejected the Kopfpauschale as ‘neo-liberal’. This was regardless of the fact that the tax subsidy for low income earners that was part of the proposal would have significantly increased the effective contribution of high income earners – indeed to an extent that appeared outright shocking to the traditional CDU clientele, which at the time was rallying behind demands for tax relief. The Kopfpauschale was finally killed by the CSU, which managed to adopt the government position, according to which the proposal was ‘unfair’ to the Generaldirektor's secretary, while at the same time arguing that it was inconsistent with CDU and CSU remaining ‘the parties of tax relief’, including a significant lowering of the maximum rate of income tax.