Lower the marginal tax rate for labor
For employees, the high marginal rate of taxes and social security contributions on labor income lowers the incentive to work; for employers, it is, in effect, a tax on the labor factor that systematically weakens the demand for labor. The high marginal tax rate therefore needs to be reduced.
(Proposal 5, section 428)
[ . . . ]
Keep pay raises below the growth rate of labor productivity
Wage negotiators, too, must contribute to strengthening the demand for labor. In an underemployed economy, pay raises must remain below the growth rate of labor productivity in real terms. And the relevant benchmark price level is not consumer prices but rather producer prices.
(Proposal 6, sections 429 et seqq.)
Component II: Lower entitlement wages, expand the low-wage sector
26. Component II focuses on a particularly problematic area of the labor market – the low-wage sector. Unskilled workers, whose rate of unemployment is especially high, are chiefly in this segment of the labor market. Numerous wage subsidies, for example in the form of payroll and reintegration grants, are already used in Germany to enhance the attractiveness of jobs for employees and employers alike. The resulting employment effects are limited, however, and depend above all, as the international evidence shows, on the specifics of a country’s social security system and on its labor market structures. Studies and experience to date indicate that labor subsidization programs that do not lower the entitlement wage, and that do not target specific groups, yield no noteworthy employment effects at an acceptable cost. General wage subsidies that do not target specific groups cannot be financed without lowering the entitlement wage owing to the wide income corridor within which jobs are subsidized.
27. With an eye to reinforcing incentives to take up gainful employment and to lowering wage costs in the low-wage sector, the German Council of Economic Experts is considering a comprehensive three-part reform of the present system of wage substitutes and wage supplements. The first part foresees shortening the entitlement period for receiving (contributions-based) unemployment pay [Arbeitslosengeld] to twelve months in order to give the older, long-term unemployed a greater incentive to work and at the same time to generally enhance the attractiveness of the labor factor by reducing non-wage labor costs. This step would per se ease the burden on the statutory unemployment insurance fund [Arbeitslosenversicherung] by 5.5 billion Euros; even after allowing for a corresponding increase in expenditure on (means tested) unemployment aid [Arbeitslosenhilfe] and for lower receipts for other branches of the social security insurance system; this measure would still yield net fiscal savings of 1.5 billion Euros.
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