Examining German Labour Market Reforms - The German "Mini-Job" Programme Should be Eliminated

Since the start of 2013, marginal employees in Germany with so-called "mini-jobs" – i.e. positions that are not subject to social insurance contributions and income taxation – may earn an additional 50 euros per month, bringing their total deduction-free monthly earnings to 450 euros. With this change, the federal government has strengthened a labour market instrument that should, instead, have long been sent back to the testing laboratory, says ZEW labour economist Holger Bonin.

Since 2007 Prof. Dr. Holger Bonin has been head of the Research Department “Labour Markets, Human Resources and Social Policy” at ZEW. In addition, he is a professor of economics with focus on labour markets and social security at the University of Kassel. Prof. Bonin has studied the efficacy of social benefits related to marriage and family, employment problems related to low qualification levels, and the economic consequences of demographic change. He is a Research Associate at the Institute for the Study of Labor (IZA) and Member of the Population Economics Division of the German Economic Association.

The number of individuals with mini-jobs has continuously risen in Germany over the past few years. Why are these jobs so popular?

Of course, it is the gross for net formula that makes these jobs so enticing. In particular male employees are glad to take on marginal part-time work in order to supplement their primary occupation. This is more appealing than paid overtime, which is subject to taxes and social insurance deductions. For mothers who wish to work for only a few hours a week, mini-jobs seem to be more appealing than part-time employment, which is subject to a hefty second-earner penalty. In this way, mothers can avoid the high implicit taxes resulting from the “splitting rule” (which allows spouses to pool and equally divide their income to determine tax liability) and benefit from free co-insurance with their working husband in the statutory public health scheme. And from the employers’ perspective, marginal part-time workers constitute a flexible reserve that helps to lower labour costs.

Mini-jobs were created to build a bridge to regular employment. Do they function in this way?

No. In any event, the rate of successful transition from marginal to regular employment is very low. Women in particular, who often take on mini-jobs in areas far from their previous occupation, find themselves caught in a trap due to stigmatization and the rapid erosion of qualification. There is some evidence that long-term unemployed individuals who take on marginal employment matching their qualification level are likelier at a later point to be employed in permanent jobs subject to social insurance contributions than other long-term unemployed individuals. However, this is hardly an argument for the tax-free status of mini-jobs. In fact, for recipients of social welfare benefits, the tax-free status plays no role whatsoever as an incentive for finding a job. According to current law, any social insurance deductions that might be due would be compensated by social welfare payments. For this reason, the current plan to increase the tax-free threshold will also have no effect on the majority of long-term unemployed individuals, who have not even completely exhausted the former 400 euro limit.

Do mini-jobs result in the loss of full-time job positions subject to social insurance contributions?

This is difficult to evaluate empirically. Perhaps it would be better to put the question a little differently. Would eliminating mini-jobs create additional normal job positions that could provide adequate income, specifically for lower-skilled workers? Here, I am optimistic. Of course, we should not rely on the simplistic formula that four mini-jobs sum up to one full-time position – the loss of the cost advantages of mini-jobs for employers will result in reduced labour demand. Yet many simple jobs, such as stocking supermarket shelves or cleaning work, which are often organised in the form of mini-jobs today, cannot be readily eliminated. The argument that some firms only need employees for a few hours a week also does not hold water. These firms could meet their needs by contracting with employment agencies that work with full-time employees.

What are the working conditions like in mini-jobs?

Many people working mini-jobs do not feel their working conditions are that bad. However, many of them work for low wages. And this is only to some extent the result of low qualification or of a small creation of value added. Being exempted from taxation and social insurance contributions is an advantage, compared to regular employment conditions. Strong employers absorb a share of this advantage, through unpaid extra hours or other means. Besides, many mini-jobbers report about cash-in-hand work. 

What should be changed about mini-jobs – or should they simply be eliminated?

Even though it is an unpopular position, I argue for their elimination. ZEW has performed calculations showing that the labour supply would increase perceptibly if people were no longer stuck in the mini-job trap. Certainly, a non-bureaucratic solution for contingent work would make sense. But to accomplish this, exemption from social insurance deductions for monthly earnings up to 100 euros would be sufficient.