Learning the wrong German lessons
Over the summer, the newspapers reported Conservative sources arguing for Britain to copy Germany's 'mini-jobs'. Fraser Nelson at the Daily Telegraph hailed the policy as a German answer to our 'broken' jobs market. Elizabeth Truss, for the Free Enterprise Group of Tory MPs, pointed to the success of mini-jobs to argue for increased labour market flexibility. The Financial Times reported that George Osborne and Boris Johnson were both talking up the scheme.
But the Conservative proposals are quite different from mini-jobs as Germans would understand them. As this report shows, the German scheme is a solution to specific German problems, which do not afflict our labour market. The impact of mini-jobs on unemployment in Germany has been exaggerated in British news stories - which have not reported the link to problems like increased involuntary part-time working.
Instead, 'mini-jobs' looks like a variation on a well know theme - using the recession to justify weaker rights for workers. What Britain needs is a policy that raises wages to stimulate demand and an end to austerity. There are lessons to be learned from Germany, especially about industrial policy, but we do not need to import mini-jobs.
What are mini-jobs?
In Germany, 'mini-jobs' are jobs with low hourly wages and/or low working hours paying ?400 a month or less. These jobs are treated differently in the tax and social insurance system from other types of job - they are not subject to employee social security contributions or income tax but employers pay contributions at a higher rate than for other jobs. In other respects, they are regulated in the same way (including with respect to employment rights) as other jobs, in principle at least.
'Mini-jobs' in Germany have been a distinct category of employment since the 1960's, when they were introduced as a way of encouraging part-time employment for married women. In 2003, as part of a wide-ranging set of labour market and social security reforms (the 'Hartz' reforms), changes were introduced to expand 'mini-job' employment:
- A maximum hours rule was abandoned;
- The earnings limit was raised to ?400;
- Second jobs paying less than this were exempted from employee social security contributions and income tax;
- At the same time, the rate of employer contributions was raised (and raised again in 2006 to 31%).
German mini-jobs are regulated in the same way as other fixed term and temporary jobs - they do not provide a precedent for relaxed dismissal policies.
Why Germany promotes mini-jobs, and the UK doesn't need them
There are three main reasons Germany implemented these reforms, none of which are relevant to the UK:
- Germany does not have an equivalent of the UK's primary threshold for National Insurance Contributions (NICs), so mini-jobs effectively exempt very low paid workers (but not their employers, who actually pay higher Contributions) from paying national insurance. Given that low paid UK workers who earn less than the primary threshold (£146 a week, and much more than the German mini-job limit) do not pay NICs, and their employers do not either, this reform is not relevant to the UK context - a comparable exemption already exists.
- In Germany, couples are taxed jointly on their earnings. This means that where someone has a working partner who is already paying income tax they will have to pay at a higher rate, even on low earnings. Mini-jobs help address this problem because they are not taken into account in calculating the tax liability for a couple. In the UK, where taxation is based on individual earnings, this is not an issue and again, the reform is not necessary.
- Access to German health care depends on social security contributions, either those of a partner or one's own. Second earners in couples who stop being 'dependents' and become 'workers' risk losing healthcare benefits if their contributions are too low or broken for whatever reason. Mini-jobs do not affect health insurance entitlements, so people with working partners continue to be fully covered by their spouses' insurance. In the UK, healthcare is free at the point of use and is not contribution based - the same problem does not exist.
Is there any role for German style mini-jobs in the UK?
The only features of German mini-jobs not already replicated in this country's tax and benefit system are:
- The higher contribution rate for employers.
- The opportunity to add a mini-job to an existing job without paying additional tax or NI contributions.
It would be startling if the Conservative advocates of mini-jobs were calling for higher employer NI Contributions for any group of workers, though there is a good case for making this change. The current rules mean that jobs at less than 17 hours a week at the minimum wage are below the employer threshold. In their recent Touchstone pamphlet Making a Contribution, Declan Gaffney and Kate Bell noted that the current arrangements encourage employers to keep working hours down artificially and argued that the UK probably has somewhat too many mini-jobs already due to this exemption. Removing this exemption would remove this perverse incentive.
Have German mini-jobs been a success?
Evaluations of the mini-jobs reforms have found they had very limited impact on overall employment: some unemployed and economically inactive workers moved into jobs, but this was offset by previously employed workers moving into mini-jobs.
It is sometimes claimed that the reform led to the creation of over half a million mini-jobs, but nearly half of this increase was due to a change in classification and most of the rest was not as positive as it first seems. Under the Harz reforms, the upper pay limit for mini-jobs was raised from ?325 to ?400: 241,000 of the 'new' mini-jobs were people already earning over the old limit but below the new one. Another 196,000 were people who had previously been earning over ?400 who presumably saw the opportunity of raising their net income by reducing their gross. The actual increase was 86,000 jobs, not half a million. At a time of strong economic growth, it is arguable that much of this change was a result of developments in the wider economy rather than these reforms specifically.
One of the main impacts of the mini-jobs reforms was to increase second job holding by single men. This aspect has been the subject of withering criticism; one review of the Hartz reforms noted that
'This part of the reform is neither financially sustainable nor useful from a flexicurity-viewpoint because it gives advantages to those groups who already have income security.'
A policy that gets its main employment effects through subsidising second jobs for existing workers offers no model of reform for the UK or any other national economy.
The German labour market has performed very well over the past decade, but it would be a mistake to attribute this to one element of a much broader set of reforms.
Immediately after these reforms, Germany was a participant in a European jobs boom that also saw major increases in employment in other countries. It is mainly since the financial markets crash that Germany's performance can be said to have been truly exceptional compared to countries with similar welfare systems:
Change in employment rate from 2003 by age band
Learning the wrong German lessons
If specific features of the labour market and social security systems have helped Germany achieve such strong labour market performance since the recession began, it makes more sense to focus on the 'kurzarbeit' short time working scheme, which helps companies and workers to survive temporary down-turns by subsidising a period of reduced hours working.
But other features of the German policy landscape are more salient. Germany's industrial policy and training system, its effective investment structures and its highly-developed tradition of social partnership between employers and unions have given their economy a resilience that the English-speaking model has lacked.
If the desire to learn lessons from Germany is genuine, not a disguise for an assault on workers' rights, it is to this mix of long-term policies our politicians should look, not to mini-jobs.
Is there a case for a different type of UK mini-job?
It is possible that proponents of mini-jobs misunderstand the German example and instead are simply arguing for jobs with weaker employment rights. This would be a serious mistake. For one thing, the UK already has very weak employment rights by international standards - according to the Organisation for Economic Co-operation and Development, only the USA has less employment protection.
For another, employment regulation is not the most important obstacle as identified by businesses themselves. The Department for Business Innovation and Skills has a regular Business Barometer that asks small businesses to identify the main obstacles to success. In June, the most commonly cited problem was the state of the economy, identified by 37 per cent of respondents. Of the six possible answers businesses were given to choose, 'regulations' got the lowest response - just 5 per cent. It was noticeable that when the last government partially re-regulated the labour market in the late 1990s and early 2000s, (introducing, for instance, the minimum wage and new trade union rights) this coincided with a substantial increase in employment.
The Universal Credit, due to be introduce next year, will create incentives for people to take up jobs with short hours; is this a good thing? Mini-jobs of this sort may be useful where people only want short hours, but they are unlikely, by themselves, to have much impact on poverty; they are more likely to move families from out-of-work to in-work poverty. The key question is whether people move on to longer hours. To encourage this, it might be useful to create a time limit, after which workers have to work over a threshold to benefit from in-work support.
German mini-jobs were created as a German answer to German problems. The UK faces many labour market challenges but not these and we should not import the problems mini-jobs have created or exacerbated in Germany. Some politicians and commentators seem to be using mini-jobs to reintroduce proposals for scrapping workers' rights - after failure of the Beecroft Report, perhaps these plans have to be disguised and a German scheme that is little known in this country may have seemed ideal for this purpose. But there is simply no evidence that such a plan would do anything to boost employment rates. Short hours working is not an answer to problems like in-work poverty and the government has no business diverting people who would be happy working longer hours into such jobs. Instead, they should focus on creating the decent jobs with prospects that our economy desperately needs. Notes
This report is heavily based on a briefing the TUC commissioned from Declan Gaffney [http://lartsocial.org/], an independent researcher. We are grateful to Declan for his research, but responsibility for the views expressed in this report is entirely the TUC's.
'Our jobs market is broken - and Germany may have the answer', Fraser Nelson, Daily Telegraph, 23 August 2012, http://www.telegraph.co.uk/finance/jobs/9494949/Our-jobs-market-is-broken-and-Germany-may-have-the-answer.html
A Decade of Gains - Learning Lessons from Germany, E Truss, Free Enterprise Group, 2012, http://www.freeenterprise.org.uk/sites/freeenterprise.drupalgardens.com/files/Learning%20lessons%20from%20Germany.pdf
'Treasury weighs German 'mini-jobs' scheme', Helen Warrell and Chris Bryant, Financial Times, August 19 2012 http://www.ft.com/cms/s/0/30c22eda-ea18-11e1-929b-00144feab49a.html#axzz26QYIPnNA
Though Weinkopf suggests that regulation is evaded more by mini-job employers http://www.genderwork.ca/cpdworkingpapers/weinkopf.pdf
In 2009, the TUC and the Federation of Small Businesses argued for the introduction of such a scheme: http://www.tuc.org.uk/extras/wagesubsidies.pdf
The TUC has developed this argument at length in German lessons: developingindustrial policy in the UK, 2012,
'How do OECD labour markets perform?', OECD, http://www.oecd.org/employment/employmentpoliciesanddata/howdooecdlabourmarketsperform.htm
SME Business Barometer, BIS, 2012, http://www.bis.gov.uk/assets/biscore/enterprise/docs/s/12-p75c-sme-business-barometer-june-2012
Issued: 4 October, 2012