ifo Institute: Low Earners in Germany Have Too Little Incentive to Work

ifo Institute | For single people with low wages, there is little financial incentive to work full time. If they had an additional income of EUR 10 per hour gross, they would see only EUR 2.50 to 3.90 of this in their net income. This is a finding of a study by ifo researchers Andreas Peichl and Maximilian Blömer for the Bertelsmann Stiftung. “The fatal combination of taxes, social security contributions, and the high withdrawal rate of benefits are to blame,” Peichl says. “This error in the system must be corrected. The workforce is shrinking, and soon we’ll need all hands on deck.”

According to Peichl and Blömer, similar calculations also apply to single parents with two children, mostly mothers. Even working a few hours more than a small job that pays EUR 100 a month is barely worthwhile. When compared to claiming  long term unemployment benefits (Arbeitslosengeld II), taking on a marginal employment (so called mini-jobs) that pays EUR 10 an hour would leave the worker with only EUR 3.80 in additional net income. Working a part-time job of 20 hours a week at EUR 10 (gross) an hour would leave only EUR 2.90; in a full-time job of 40 hours a week, the worker earns EUR 3.90.

In the case of married couples, secondary earners also face the burden of high taxes and social security contributions if they work part-time or full-time jobs due to the German system of tax splitting. For example, if partner one earns EUR 48,000 gross a year and partner two (as the secondary earner) has a mini-job (10 hours a week) that pays EUR 10 an hour, this would bring in an additional EUR 5,400 a year. A second income from a part-time job of 20 hours a week with a gross wage of EUR 10 an hour would provide the family with an additional EUR 6,293 a year. “So for working twice as many hours, the difference in the amount the secondary earner actually brings home is less than EUR 1,000. There is something fundamentally wrong with that,” Peichl says. “It isn’t fair, and provides no incentive – especially for married women – to work more, even though the baby boomers are now slowly starting to retire.” 

Of 7.6 million married women of working age, 6 million have a lower income than their husbands and are therefore secondary earners that face this.