Unemployment insurance versus means-tested unemployment benefit
Unemployed people are covered by unemployment insurance (Arbeitslosenversicherung) or by means-tested unemployment benefit for job-seekers (Grundsicherung für Arbeitsuchende). The former provides unemployment benefits (Arbeitslosengeld) which amount to 67 per cent of net assessed earnings, irrespective of need. The minimum qualifying period is 12 months of contributions paid to the Federal Employment Agency. The latter is tax-funded and provides a needs-based welfare benefit for people who are capable of work but who do not earn enough from their employment to live from it, or who are not eligible for unemployment insurance benefits. If the unemployment insurance is not sufficient to cover the subsistence minimum, it will be topped up by means-tested unemeployment benefit.
Recent trends in unemployment
Since the spring of 2005, unemployment in Germany has dropped by almost half. This downward trend was briefly interrupted during the deep recession of 2008/09. Since the beginning of 2012, unemployment has remained static. Recently, those who are out of work are benefiting little from the healthy labour market – partly because their profiles do not match employer demand, and partly because firms are increasingly able to draw on a high labour force potential which is being fed by immigration and a greater participation of women and older people in gainful employment.
Of the 8.47 million employment contracts taken up in 2013, only one in four was filled by a person who had previously been unemployed (26.4 per cent). In 2007 it had still been almost one in three positions (31.6 per cent). The chance of being able to take up employment in the regular labour market from a situation of unemployment sank from 7 per cent monthly in 2011 to 6.3 per cent in 2014. This trend may potentially lead to a renewed entrenchment of unemployment.
As in many other advanced economies, long-term unemployment is a key policy challenge in Germany (see the section on “International comparisons”). Between 2005 and 2011, the number of long-term unemployed – that is, out of work for longer than 12 months – decreased from about 1.8 million to roughly 1 million. Since then, long-term unemployment has stagnated at this level, despite the fact that employment continued to increase.
The stagnation in the level of long-term unemployment over the last years was accompanied by the development of certain dynamics within this group. In 2014, a total of 1.5 million people were able to end or interrupt long-term unemployment. However, an additional 785,000 people stayed unemployed for longer than 12 months, thus entering the cohort of long-term unemployed. Furthermore, another 660,000 people returned to long-term unemployment after a short interruption.
Monthly transition rates showed that only about 1.5 per cent of unemployed people in a given month were able to overcome unemployment by taking up unsubsidized employment. In 2014, about 185,000 long-term unemployed started such a job. For the short-term unemployed, the comparable transition rate was 9.3 per cent – that is, there were more than 2 million transitions from unemployment to unsubsidized employment.
The duration of unemployment has also increased over the last years: the proportion of long-term unemployed in relation to the total number of unemployed increased from 33 per cent in 2009 to 37 per cent in 2014. Between 2010 and 2015, the share of the long-term unemployed with an unemployment duration of more than two years increased from 50 to 56 per cent.
Long-term unemployment is often correlated with individual characteristics which unfavourably affect a person’s labour market prospects. Advanced age and low levels of qualification are the main risks for successful labour market integration. One in two long-term unemployed people have no vocational qualification, and around 50 per cent search only for a job with a low qualification level. About 56 per cent are older than 45; 27 per cent are older than 55.
For several reasons, the probability of finding a job in Germany also depends on the duration of previous unemployment. One main problem for the unemployed is that a lack of work experience during long periods of unemployment leads to a loss in human capital. Another factor is that firms rank applications to find the appropriate candidate. For this ranking, or sorting, firms use the unemployment duration as a signal for the loss of human capital and productivity.
Almost all long-term unemployed people receive means-tested unemployment benefit to cover housing and living costs for their families. Conversely, only about 21 per cent of all means-tested unemployment benefit (‘SGB II’) recipients are long-term unemployed. Another 24 per cent are short-term unemployed; the others are either temporarily unavailable for work on labour market training programmes, or in low-paid regular employment. In 2014, about 3.1 million out of 4.4 million recipients of SGB II who were available for work were long-term recipients, that is, they had had at least 22 months of benefit receipt during the last two years. Therefore, not only long-term unemployment, but also long-term benefit receipt is a major issue in the German labour market policy debate.
Low skills and unemployment
In Germany, it remains the case that employment trajectories and earnings vary greatly, and are heavily correlated with qualifications. On the one hand, unemployed people with low qualifications have great difficulty finding employment; on the other, many employers complain of the difficulties of finding suitably qualified applicants to fill their vacant positions. Such a situation is termed a ‘mismatch’: the supply of and demand for labour do not match each other because of disparities in qualifications, occupations or regions.
If one compares the employers’ qualification requirements with the skill-profiles of those who are out of work, considerable discrepancies become clear. Those with low qualifications do not only run a high risk of unemployment in comparison to those who are higher qualified; but, in addition, the unemployment risk varies across regions.
Nearly half of unemployed people in Germany are in a position to only perform menial work because of a lack of qualifications. By contrast however, only one in seven vacancies requires this level of qualifications.
Furthermore, the employment prospects of low-qualified jobseekers vary considerably from region to region. In the eastern part of Germany, but also in some west-German regions such as the Ruhr area and numerous major cities, jobseekers with low skills have particular difficulties in finding appropriate work. On the other hand, the labour market for unskilled workers is most favourable in certain industrial regions such as Bavaria and Baden-Württemberg as well as in rural regions such as the Rhineland-Palatinate and Lower Saxony.
The new German minimum wage: impact on the labour market
On 1 January 2015, a statutory minimum wage of €8.50 per hour was introduced in Germany. The law was proposed as a result of increasing wage inequality and decreasing collective bargaining coverage over the last 20 years.
Predictions regarding the employment effects of the minimum wage diverge. On the one hand, the minimum wage could reduce overall employment by restricting the market for wages below €8.50 per hour of work. Firms would not be able to employ individuals whose productivity was below this legal threshold. On the other hand, the minimum wage could also increase employment if more individuals are willing to take up jobs that pay an hourly wage of at least €8.50.
Descriptive figures show a drop in marginal employment by about 160,000 jobs at the beginning of 2015 when the minimum wage was introduced. However, it is not yet proven whether these jobs were transformed into regular jobs liable to pay social security, or whether these jobs were simply lost.
In anticipation of the new German minimum wage, the employers affected expected a reduction in their employment by 1 per cent. For Germany as a whole, this anticipated effect was predicted to result in an employment reduction of about 13,000 employees.
Those groups which may be most affected by the changes are young people and low-skilled employees given that they, in relative terms, have a relatively lower labour market attachment and have accrued less experience during their working lives. The employment of these groups might not be profitable to employers, thus inducing the risk of job loss.