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The German Council of Economic Experts Urges Further Reforms (November 13, 2002)

In order to boost the momentum for neoliberal reform, the German Council of Economic Experts proposed a twenty-point program for “employment and growth” in its annual report for 2002-03. It advocated reducing labor costs, limiting unemployment benefits, capping health care costs, and consolidating finances.

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Twenty Points for Employment and Growth

With its annual report, the German Council of Economic Experts is presenting a comprehensive twenty-point reform program to strengthen the forces driving the economy. The core of this program for employment and growth is the reform of the labor market, since the present institutional structure is partially responsible for the dire state of the labor market. Politics must get to the root of the problem. It must create better conditions for strengthening the demand for labor, create greater labor market flexibility, and lower entitlement wages and at the same time expand the low-wage sector. The Council of Economic Experts finds the proposals of the Hartz Commission insufficient. For the low-wage sector, the Council of Economic Experts is discussing a three-part package of measures that will increase the attractiveness of jobs for employers and employees alike by fundamentally restructuring entitlement wages and welfare benefits. In contrast to the political proposals currently on the table, this plan would significantly reduce entitlement wages. In general, the reform proposal of the Council of Economic Experts would not lead to additional fiscal burdens, despite the fact that welfare recipients who start working would be allowed to keep a larger share of their cash transfer income than is currently the case, and although contribution rates for unemployment insurance would be lowered. It would pay to work again.

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III. A program for employment and growth

18. Since the mid-1990s, the course of economic development in Germany has been disappointing, and Germany has already been called the slowpoke of Europe on multiple occasions. Germany’s gross national product has been growing far more slowly than those of other European Union countries; in comparison with the United States, Germany’s performance is even poorer. Therefore, firstly, the German Council of Economic Experts is devoting its economic policy remarks to an analysis of the weak points in German economic growth, and, secondly, it is presenting a twenty-point program to strengthen economic growth forces and to overcome the high level of unemployment. The core of this program is the radical structural reform of the labor market, the health system, and public finance and taxation policy.

The approach taken in the coalition agreement between the Social Democratic Party and the Green Party on October 16, 2002, and in the ad hoc measures and the Vorschaltgesetze (announced laws preceding major reform laws planned for a later point in time) is to merely deal with the symptoms of the German malaise, and this is the wrong approach. What is needed instead is a fearlessly frank diagnosis, for this is the only basis upon which a long-term, holistic therapy can be developed. Only through radical structural reform can Germany make itself fit to face the growing challenges posed by global competition, technical progress, and an aging population.

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Component I: Strengthen the demand for labor

24. One of the main hurdles to employment in Germany is the heavy burden of taxes and social security contributions on labor income. For a single person with average earnings, the marginal tax rate can currently reach 67 percent of employee compensation. A large part of the overall marginal tax burden in this income bracket is attributable to the rates of contribution to the social security system. The high marginal tax contribution rate pushes up the cost of labor for enterprises and drives a wedge between total labor costs and employees’ net pay. As a result, fewer jobs are available and the employment level drops. The German Council of Economic Experts therefore demands the following:

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