ZEW President Wolfgang Franz on Combined Wages

It is well-known that the German government intends to evaluate the possibility of introducing combined wages. Therefore, the government asked the German Council of Economic Experts to provide an expert report on the subject. The Council has presented its report titled “Arbeitslosengeld II reformieren: ein zielgerichtetes Kombilohnmodell” (Reform Unemployment Benefit II: a Target-Oriented Combined Wages Model). The report received a lot of feedback, but unfortunately criticism was not always constructive. Even before any details were published, the German Council of Economic Experts was accused of planning to cut long-term unemployment benefit.

This is not at all the case. Everyone on long-term unemployment benefit can still receive the full amount, despite the suggestion to lower the standard rate. The only condition is that beneficiaries must be actively trying to find employment on the regular labour market or to work in an employment opportunity programme. It cannot be emphasized enough that long-term unemployment benefit is not the same as an insurance benefit, but rather a welfare benefit for those in need. As a result, society can set the above mentioned condition. This is also in line with the German Social Code’s legal framework, which is in fact much stricter than the suggestion by the German Council of Economic Experts. In the case that job offers are rejected, long-term unemployment benefits can already be reduced significantly by more than 30 per cent, as stated in the Council’s model. Of course, the legislator is free to go further than the 30 per cent reduction suggested by the Council. The main difference from the existing practice is the reversal of the burden of proof. The unemployed person needs to become active on their own in order to reach the previous benefit level. Therefore, the Council’s model does not consider unemployed people to be so-called “slackers” or “bums,” since the vast majority of them are not. Why is the Council’s model based on long-term unemployment benefit? Firstly, long-term unemployment benefit already has the qualities of combined wages. For example, in the case of low income, a wage subsidy can be granted. Secondly, the target group orientation is comparatively high. About three quarters of unemployed people with low qualification as well as the long-term unemployed – that is, the problem groups on the labour market - can claim long-term unemployment benefits. Thirdly, within the framework of long-term unemployment benefit, a means test is carried out, which should be a prerequisite for claiming combined wages anyway. The work opportunities programme is a figurative regulatory bullet that needs to be bitten, because there is no other way to increase the attractiveness of regular employment while ensuring the state-guaranteed minimum income. It would be naïve to deny the danger of crowding-out effects. Still, the issue should not be exaggerated. Once the Council’s model is in full effect, the number of work opportunities will be lower than it currently is. The experts’ calculations indicate that the positive employment effect on the regular labour market will benefit 350,000 people. The introduction of combined wages is of course no silver bullet for reducing unemployment. It can’t replace labour market reforms and it certainly won’t relieve parties of their responsibility under collective bargaining agreements. Wage policy must further differentiate wage structures according to qualification, especially in the low-wage sector. Still, minimum income needs to be guaranteed.