Unemployment of low-skill workers in Germany - Would an earned income tax implemented on the EU level help to strengthen their position?

Table of Contents

1. Abstract

2.Unemployment in Germany-Statistic
2.1 Low skill workers
2.2 Situation of low skill workers in Germany
2.3 Social benefits in Germany
2.4 Hartz IV Politics
2.5 Conclusion of the German job market

3. Unemployment in Great Britain
3.1 Situation of low skill workers in Great Britain
3.2 Earned income Tax
3.3Comparison between Germany and Great Britain

4. European social policy
4.1 Recent measures
4.2 Earned income tax on EU level?

5. Conclusion

6. Appendix

7. Literature List
7.1 Books and Articles
7.2 Official websides

1. Abstract

Unemployment is a problem for every member state in the EU, even though the numbers of unemployed people vary from country to country. Especially for the countries which are grouped into the continental system (France or Germany) the problem is severe. On the other hand other countries have improved their markets and now have less unemployment than in the 1980th, for example Great Britain or Spain.

However, in every country one group is seen as especially problematic and those are the low skilled workers. Persons without good education or professional training run a high risk of becoming unemployed. Compared to academics in Germany their number unemployment is four times as high in this group. This is partly due to the fact that the global competition has become stronger during the last years. Since the wages in other countries are lower this leads to cheaper production cost for the companies in those places. Especially for labour intensive industries this is a problem, and those industries normally provide the jobs for low skill workers. Thus all countries have taken measures to integrate this group better into the world market.

The leading question for this paper is why Great Britain has been more successful in integrating this group in the work market than for example Germany. One program that will be introduced is an earned income tax. This means that low skill workers become additional money, for the case that they have a job that pays only little money. With this program the British government motivated people to take jobs, even though the hourly wage is not high. This program worked well and got extended in April 2003.

In the end of the paper the question will get discussed if the earned income tax would even be an option for the whole of Europe. Since companies act on a worldwide market, some employment problems extend the boarders of nation states. In order to answer this question, the actual politics in this field of the EU will shortly be described. Social policy was historically never one of the most harmonized fields. But with the Maastricht and especially with the Lisbon strategy member states agreed to certain measures in this field. The question is how far this arrangement go, and whether or not an earned income tax is realistic in the near future for low skill workers.

This paper will argue that this is not the case yet, as the member states are unwilling to give (re)-distributive power to the EU level. But some measures as the best-practice exchange might enhance chances that member states analyse the market, and implement it nationally. The actually of this debate can be seen by following the German politics. The SPD, one of the two big parties in Germany agreed on their summit meeting on the 06.01.2007 to release people with an income under 1.300 Euro from taxes. This was agreed in order to motivate people stronger to work again. Thus an earned income tax might be a new step, and possibly the strategy for the future.

2. Unemployment in Germany-Statistic

The unemployment rate in Germany belonged to the highest in Europe during the course of the last years. In 2005 the number rose above the five million mark, which equalled 12, 2% of the possible working population. A distinction can be drawn between the different regions in Germany, especially between the eastern and western part. The unemployment number in East Germany almost reached 20% in February 2006, compared to 10, 2% in Western Germany. (Bundesamt für Statistik, 2006) Problems of the German reunification with the change from socialism to social market economy can still be seen in Eastern Germany. Sahner assumes that this problem will remain in the future, since the catching up-process of the economy in Eastern Germany has slowed down (2000).

Those numbers have to be seen critical, since unemployment is also a question of definition. For example, since January 2005 people that receive social welfare and that also have limited abilities to work due to physical problems are also included in the statistic. Before that, this was not the case, and so the unemployment rate rose around 1% or 400.000 people.

The international labour organization (ILO) has different standards for counting unemployment. The major advantage is that this organization makes numbers comparable for different countries. For July 2006 they measured 8, 2% unemployment in Germany, which is more than 2% less than in official German statistics. But nonetheless the number is still above average in the Euro zone as well as above the average of the EU of 25.^[1] This shows that compared on an international scale the unemployment rate in Germany is still relatively high.

Especially problematic is the high number of long-term unemployed people^[2]. 1, 7 million persons belonged to this group in April 2006, which equals 53, 0% of all persons without a job. Only in Czech and Greece the numbers are similar high. In Sweden only 14, 7% of all unemployed belonged to this group, in Denmark 23, 4% (Troost, 2006). For the working agencies it is problematic to integrate those people into the job market again. Working skills decrease when they are not used for a long time, since the demands change because of technological or other developments.

During the course of 2006 the numbers sank again as the economy in Germany grew around 2, 5%. Thus new jobs were created, and the number of unemployed people went down to a little under 4 million. Even though this meant a decline of over 1 million, the long-term unemployment number did not change significantly. This indicates that economic pick-up does not necessarily help this group.

2.1 Low skill workers

In highly industrialised countries specialised and complex abilities are needed in most jobs. Since the globalization of the world offers chances for companies to produce virtually everywhere, the competition for market shares becomes harder. Factories often get moved to places where the hourly earnings are far below German and European standards. China for example has a lot of workers which are willing to work for a fraction of the wages paid in Germany. Thus highly industrialised countries have to invest money into research and education in order to create knowledge which is not existent in other countries.

But participation is not possible for everybody, as recent statistic show. Germany has an education system that separates students after the fourth grades. Three different secondary school types are provided; the teachers normally give recommendations which school the students should attend.

The “Abitur” is the highest diploma for students, and 27, 3% left school with this diploma in the year 1999. Compared to only 6, 1% that earned this diploma 1960 this is a positive trend for the German education system. Most students still leave school after ten years from the “Realschule”, 47, 4% did this in the year 1999. Those students are normally described as unproblematic for the job market and most of them can get successfully integrated. The “Hauptschule”, generally the school with the lowest educationally level, often gets criticized in the media in Germany. Students are often not qualified enough for the job market, employers complain about the standards this students often have in math or German. (Fischermann and Rudzio, 2006). 27, 0% of all students only receive this diploma in the end of their school career, which is already a bad start into the working life. Even worse is the situation for the 9, 3% that leave school without any qualification. When those two last numbers get combined, it can be concluded that over one/third of all students leave school without a diploma that is seen as the minimum requirement in order to find a qualified job.^[3]

Compared to other countries in the world, the number of people that participate in in-work education is relatively low. From 17 industrialised countries that got compared by Eichhorst, Profit and Thode only two scored less than Germany in this criteria (2001). This means that if the school education is low, there is a high risk that the qualifications remain low for the rest of the life.

2.2 Situation of low skill workers in Germany

Most of the low skilled people hold jobs as workers, often without additional qualifications. A study of the “Bundesanstalt für Arbeit proved this, by comparing different working groups and the most common school qualification. In the working group 56% had a “Hauptschulabschluss”^[4]. In the group of appointees this number shrinks to 26%, while in the group of clerks for the state only 13% owned this diploma (Biersack, Dostal, Parmentier, Pflicht and Troll, 2001; p129-133) This indicates that people with a low school education, most often work in jobs which require less skills, but also in positions that are easier to be replaced.

The same study also points out the development of the different kind of jobs regarding the importance for society and the percentage of jobs which are available in each sector. One result of this research is that the amount of employees is rising in contrast to the declining percentage of workers. 1992 36% of all working people hold a job as a labourer compared to 44% as an appointee. Only seven years later the numbers have changed to 32% labourers and to 49% appointees. (Biersack, Dostal, Parmentier, Pflicht and Troll, 2001; p.126)

A closer look at the unemployment statistics of Germany proves the worsened situation for workers without additional qualification. In the western part of Germany 21, 7% of workers without vocational training and with a Hauptschulabschluss are unemployed. In East Germany the numbers are even a lot higher, more than halve of those groups have no job. On the other hand the unemployment rate for scholars in western Germany is 3, 4% and 6, 0 % in eastern Germany. (Bundesamt für Statistik, 2006) This shows that qualification is the crucial factor that decides about the chances on the job market.

In praxis this becomes more clearly by taking a closer look at the traditional German industries. The Ruhrgebiet, for example was once the most industrialised congested area in the world, as coal and steel were produced there. Over 3.200 mines were in use, and people from different European countries immigrated into Germany since workforce was needed. Today the extraction of coal has become too expensive, and most of the mines had to be closed, while the rest gets subsidised by the government. German coal is worldwide too expensive, as the resource can only be found deeply under the ground, but also because German labour force has become more expensive. Thus the Ruhrgebiet had to change its structure in order to stay competitive for the 21st century. Dortmund, one of the biggest cities of the region, is now a major city for insurances and has a university for engineering. The looser of this development are the low skill workers, as they are not able to use their skills in the new surrounding. Therefore the unemployment and the poverty rate in the Ruhrgebiet belong to the highest in Germany. In Gelsenkirchen for example around 20% of the people are unemployed, most of them belong to the age group 50 or above and a lot of them have a different nationality than German. (Strohmeier, 2001)

Altogether it can be concluded that in Germany a high level of qualification is necessary in order to have a good chance to get a job. If the school qualification is low, it is of special importance to complete a vocational training. People with a low level of school qualification and no vocational training face by far the biggest risk of becoming unemployed. Compared to other industrialised nations the integration of low skill workers into the work market is even more problematic. (Berthold, von Berchem, 2005; p.25) One reason for this might be the high level of social benefits. This thesis will be closer examined in the next chapter.

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^[1] For a closer definition of ILO standards: http://www.ilo.org/

^[2] Longer than one year without a job

^[3] See the development more detailed in the appendix

^[4] Eguals the English CSE