Distributive Justice in Germany? Germany’s Welfare State Fares Well when Compared Internationally

Does Germany need more income redistribution? Andreas Peichl, head of the new ZEW Research Group "International Distribution and Redistribution", argues that Germany’s tax-transfer system exhibits good performance relative to other countries.

Andreas Peichl is head of ZEW’s International Distribution and Redistribution research unit. He is also Professor of Quantitative Public Economics at the University of Mannheim. His research focuses on empirical public and labour economics. His current interests include the effects of taxation on budgets and income distribution, tax incidence, and the optimal design of tax and transfer policy from an international perspective.

Your calculations show that income inequality in Germany has increased only marginally. But if we are to believe public opinion, many people in Germany are becoming poorer. Why the apparent gap between perception and reality?

First let me stress that inequality per se is not bad. On the contrary, we need a certain level of inequality to create a dynamic society. Too much equality eliminates economic incentives, as we saw in the case of Soviet-era socialism.

Compared with other countries, our society does not have an especially high level of inequality. Right now, inequality is slightly lower than in the early 1960s but higher than in the 1980s. There are always short-term trends and fluctuations, but over the long run most inequality indicators for Germany have remained relatively stable.

What we do observe, however, is that the tails of society are drifting further apart, polarising the income distribution. The top 1per cent of the population is becoming richer and richer, while the bottom 10 to 15 per cent are missing out. This partly explains why inequality has increased over the past couple of years. We’ll have to wait and see and if the trend continues. Still, Germany’s welfare state performs very well, and helps to considerably reduce inequality in market incomes.

So in your estimation income redistribution in Germany is doing well and meeting its goals?

Yes, you can say that. We can quibble about the details, of course, but for the most part we live in a very effective welfare state. Income redistribution works quite well – the wealthiest 10 per cent pay more than 50 per cent of income taxes, while the poorest 50 per cent pay less than 5 per cent. The state ensures that all citizens can meet their basic needs and the institutional infrastructure is excellent, especially relative to other countries. And despite the justified criticism of its educational system, Germany has a fairly high level of upward mobility compared to other countries.

You mentioned that inequality – poverty at the lower extreme of the income distribution – is increasing. How has the Hartz IV reform contributed to that trend?

Between the late 1990s and 2005, the at-risk-of-poverty rate rose from 10per cent to 15per cent, and has remained constant ever since. The Hartz IV reform did not take effect until 2005, and hence could not have been responsible. A general problem with measuring poverty in developed countries is that poverty always stands in relation to average income. If average incomes increase faster than lower incomes, poverty increases, even as welfare benefits like Hartz IV continue to safeguard people’s basic needs. The real problem with the Hartz IV reform is that it hasn’t done anything to address the problem groups – low-skilled workers and the long-term unemployed. Another difficulty is the expansion of the low-wage sector through poorly paid part-time work and subsidised marginal employment. One could argue that any job is better than no job, of course, but many studies have shown that these are dead-end positions in which people get stuck. The only solution is better training for the problem groups, giving them the chance to earn better wages on the market.