Before and After the Hartz Reforms: The Performance of Active Labour Market Policy in Germany



Performance of Active Labour Market Policy in Germany

13


of the programme. Active measures that best represent the new activation
strategy are start-up subsidies. These are a relatively new component of
German active labour market policy. Though a so-called “bridging allowance”
(
Überbrückungsgeld) was introduced already in 1986, the number of partic-
ipants has increased only recently. The benefit is paid for 6 months and is equal
to the unemployment benefit that the recipient had previously received or
could have received plus a lump-sum social security contribution. In order to
receive the grant, the chamber of commerce has to approve the business plan.
The reform introduced an alternative subsidy, the so-called
Ich-AG (i.e. “Me,
Inc.”, or, as
The Economist (Feb 2006) translates, “Me-company”) subsidy,
which is independent of prior social security contributions. It is paid for a
maximum period of three years as long as the claimant’s income does not
exceed 25,000 € per year. It amounts to 600 € per month in the first year, 360 €
per month in the second and 240 € per month in the third year.

Furthermore, the integration into paid employment may be supported by
several forms of wage subsidies which are paid to employers when hiring a
certain type of hard-to-place worker. The idea is to compensate the firm for
the presumably lower productivity of this type of worker. The Hartz reforms
simplified eligibility conditions of so-called integration subsidies in order to
facility the access to wage subsidies, giving priority to older and disabled
workers. Generally, maximum duration varies between 6 and 24 months, de-
pending on the target group and, as a rule, the maximum rate of subsidy should
not exceed 50% of the calculable remuneration. In order to avoid substitution
effects and free riding, payments are not available when the employer ap-
parently dismissed a worker in order to receive the benefit or when he had
already employed the respective worker within the previous four years. Fur-
thermore, the Hartz reform introduced social security subsidies for employers
who employ an older worker. A firm who employs a worker of age 55 or older
is exempt from contribution to the unemployment security system for this
worker. However, the contribution amounts to only 3.25% of the gross wage.

Finally, various reform elements intend to make work pay, aiming at increasing
work incentives to the unemployed. The reform did not reduce the very high
marginal taxes on people who move from unemployment to employment.
Rather, new forms of wage subsidies were introduced and already existing
ones were modified or extended. The start-up subsidies mentioned above is
one example. Furthermore, the reform introduced incentives to workers aged
50 and older to take up employment even when it pays less than previous em-
ployment. In these cases, elderly workers may receive a wage subsidy, the
so-called wage protection, when they accept a job offer that pays less than
their previous job. The wage subsidy amounts to 50% of the difference
between the previous wage and the actual wage. It is paid for the same du-



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