Giving Recipients of Germany’s Basic Income More Net from Gross Increases Employment
ResearchStudy by ifo Institute and ZEW
Making smaller cuts to social benefits for recipients of Germany’s basic income (“Bürgergeld”) who are willing to work more would increase their participation in the labour market, according to a reform proposal elaborated by the ifo Institute and ZEW on behalf of the German Federal Ministry of Labour and Social Affairs.
“This reform would in fact bring more money into the public purse,” says Professor Andreas Peichl, director of the ifo Center for Macroeconomics and Surveys and ZEW Research Associate, who led the study. “Enacting this reform within the system, as set out by the Ministry, would increase employment by 136,000 people or 145,000 full-time positions. This would enable the reform to finance itself, as public budgets would end up with around 1.1 billion euros more in taxes and social security contributions,” says Dr. Holger Stichnoth from ZEW’s “Inequality and Public Policy” Research Group.
Fewer cuts to make extra work worthwhile
The proposal targets single parents and single people without children, as well as couples with three or more children, because this is where the employment effects occur. At present, social benefits such as the housing benefit are reduced by between 80 and 100 per cent for incomes between 520 euros and 1,000 euros per month. In order to make it worthwhile to take on additional work by ensuring that more net income is left over from the supplemental earnings, the reform provides for social benefits to be reduced by only 70 per cent in the future up to an income limit of 2,000 euros. For those earning more than 2,000 euros a month, benefits would be cut by only 65 per cent instead of 100 per cent.
“We show that this reform leaves no community of need worse off and – taking into account behavioural adjustments – is also self-financing. The results of a representative survey indicate that such a reform would meet with broad acceptance among the general public. Therefore, the hurdles to implementation should be relatively easy to overcome,” says Dr. Maximilian Blömer of the ifo Institute.
Potential for further employment effects
Stichnoth adds that the employment effects could be increased even further if the crediting rate for the additional amount of the basic child allowance was reduced from 45 per cent to 25 per cent. This would improve the position of households with children and lead to an overall rise in employment of 157,000 people and 165,000 full-time positions. This combined reform would relieve public budgets only by around 500 million euros. Peichl adds: “In fact, the current two-tier system comprising basic income and housing benefit should also be converted into a single basic social security. This would make the system much simpler and thus reduce the administrative burden. And it would have even greater employment effects.”
Underlying microsimulation models
To analyse the employment incentives in the status quo and to quantify the reform proposals, two behaviour-based microsimulation models were used:
- The „Tax and Transfer Behavioral Microsimulation Model“ of the ifo Institute – Leibniz Institute for Economic Research at the University of Munich
- The „EviSTA“ of ZEW Mannheim
The models agree with each other in terms of their basic structural approach and design. They deliver the same results for the purely legal modelling based on a large number of sample households. They use the German Socio-Economic Panel Study (SOEP) as a central database; with around 15,000 households and almost 30,000 people from these households, this is a very large sample.
Expertise: „Zur Reform der Transferentzugsraten und Verbesserung der Erwerbsanreize“ by Andreas Peichl, Holger Bonin, Holger Stichnoth et al.; Studie Nummer 629 of the Federal Ministry of Labour and Social Affairs.
