The Dual Transformation of the German Welfare State (New Perspectives in German Studies)

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The Dual Transformation of the German Welfare State Peter Bleses and Martin Seeleib-Kaiser

New Perspectives in German Studies General Editors: Professor Michael Butler, Head of the Department of German Studies, University of Birmingham and Professor William Paterson, Director of the Institute of German Studies, University of Birmingham Over the last twenty years the concept of German studies has undergone major transformation. The traditional mixture of language and literary studies, related very closely to the discipline as practised in German universities, has expanded to embrace history, politics, economics and cultural studies. The conventional boundaries between all these disciplines have become increasingly blurred, a process which has accelerated markedly since German unification in 1989/90. New Perspectives in German Studies, developed in conjunction with the Institute for German Studies at the University of Birmingham, has been designed to respond precisely to this trend of the interdisciplinary approach to the study of German and to cater for the growing interest in Germany in the context of European integration. The books in this series will focus on the modern period, from 1750 to the present day.

Titles include: Peter Bleses and Martin Seeleib-Kaiser THE DUAL TRANSFORMATION OF THE GERMAN WELFARE STATE Michael Butler and Robert Evans (editors) THE CHALLENGE OF GERMAN CULTURE Essays Presented to Wilfried van der Will Michael Butler, Malcolm Pender and Joy Charnley (editors) THE MAKING OF MODERN SWITZERLAND 1848–1998 Paul Cooke and Andrew Plowman (editors) GERMAN WRITERS AND THE POLITICS OF CULTURE Dealing with the Stasi Wolf-Dieter Eberwein and Karl Kaiser (editors) GERMANY’S NEW FOREIGN POLICY Decision-Making in an Interdependent World Jonathan Grix THE ROLE OF THE MASSES IN THE COLLAPSE OF THE GDR Margarete Kohlenbach WALTER BENJAMIN Self-Reference and Religiosity Henning Tewes GERMANY, CIVILIAN POWER AND THE NEW EUROPE Enlarging NATO and the European Union Maiken Umbach GERMAN FEDERALISM Past, Present, Future

New Perspectives in German Studies Series Standing Order ISBN 0–333–92430–4 hardcover Series Standing Order ISBN 0–333–92434–7 paperback (outside North America only) You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England

The Dual Transformation of the German Welfare State Peter Bleses Research Fellow, Law Department, University of Oldenburg, Germany

and

Martin Seeleib-Kaiser Senior Research Fellow, Centre for Social Policy Research, Bremen University, Germany

© Peter Bleses and Martin Seeleib-Kaiser 2004 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2004 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 1–4039–1784–1 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Bleses, Peter. The dual transformation of the German welfare state / Peter Bleses and Martin Seeleib-Kaiser. p. cm. — (New perspectives in German studies) Includes bibliographical references and index. ISBN 1–4039–1784–1 (cloth) 1. Germany—Social policy. 2. Welfare state—Germany. I. Seeleib—Kaiser, Martin. II. Title. III. Series. HV278.B58 2004 330.12’6—dc22 2004044699 10 13

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

Contents

List of Tables

vii

List of Figures

viii

Preface

ix

List of Abbreviations

xi

Introduction

1

Part I The Policy Dimension 1. Evaluating Policy Change: Some Theoretical and Methodological Remarks 2. Historical, Normative and Institutional Foundations of the German Welfare State in the Golden Post-World War II Era 2.1 Historical background 2.2 Norms and institutions 2.3 Summarising the social policy concept 3. Socio-economic Developments since the Mid-1970s 3.1 Economic discontinuities and the (preliminary) end of full employment 3.2 The standard employment relationship on the retreat 3.3 The end of the strong male breadwinner model? 4. The Changing Normative and Institutional Design of Social Policy 4.1 A quantitative perspective 4.2 A qualitative perspective 4.3 The dual transformation of the German welfare state

Part II

9

14 14 17 27 29 29 33 36 40 41 47 89

The Political Dimension

5. Theories Explaining Welfare State Change 5.1 Political and institutional explanations 5.2 Socio-economic explanations v

97 97 104

vi Contents

5.3 Evaluating the political, institutional and socio-economic explanations 5.4 A constructivist approach 6. Changing Interpretative Patterns 6.1 Globalisation limits social policy 6.2 Markets, personal responsibility and the welfare state 6.3 The labour market policy discourse 6.4 The pension system within the political discourse 6.5 Debates on family policy 6.6 New interpretative patterns guiding social policy reforms Part III

109 110 114 116 117 119 127 134 140

Conclusions

7. Can Germany still be Considered a Conservative Welfare State? 7.1 Reforming the welfare state – summary of the main policy changes 7.2 Explaining welfare state change 7.3 The German welfare state from a comparative perspective

145 146 150 151

Notes

155

Bibliography

168

Index

187

List of Tables 1.1 Modes of social policy intervention based on the work–welfare nexus 4.1 Development of monthly child allowance benefits: 1970–2002 4.2 Development of child tax allowances: 1962–2002 4.3 Supply of childcare facilities (number of places as a percentage of age group): 1975–1998 5.1 Public support for state responsibility in various policy areas of the welfare state (%)

vii

11 80 82 85 108

List of Figures 3.1 3.2 3.3 3.4 3.5 3.6 4.1 4.2 4.3 4.4 4.5

4.6 4.7 5.1 5.2

Annual economic growth rates: 1966–2002 Number of registered unemployed: 1965–2002 Number of labour market participants: 1970–2002 Unemployment rates: 1950–2001 Female labour force participation rates by age: 1971–2001 Female labour force participation rates in East and West Germany: 1991–2001 Social spending as a percentage of GDP: 1975–2001 Employers’ contributions to social insurance schemes as a percentage of gross wage: 1975–2003 Social spending in east and west as a percentage of GDP: 1991–2001 Expenditures for selected social policies by function as a percentage of GDP: 1995–2001 Percentages of registered unemployed receiving unemployment insurance and unemployment assistance benefits: 1975–2002 Participants in measures of ALMP (training and re-training, public employment programmes): 1991–2002 Early retirement due to unemployment: 1975–2001 Foreign trade (exports and imports) as a percentage of GDP: 1975–2002 Challenges, political discourse, interpretative patterns and policy responses

viii

30 31 32 33 37 37 43 44 45 47

54 58 72 106 112

Preface Welfare state reforms have been at the centre of German domestic policy debate for the past several decades, and in recent years this debate has gathered momentum. While international comparative analyses have for many years stressed the continuity of the German welfare state, numerous social policies have in fact been undergoing continuous reform. The common argument has been that policy development is guided by incremental reforms rather than by substantive institutional changes. Despite recently revived interest in the welfare state, many studies have been limited in their scope, concentrating on specific reforms in a limited number of welfare state programmes over relatively short time spans. This book presents a comprehensive analysis of the many social policy reforms which have been enacted within the realms of wage earnercentred and family-oriented social policies since the mid-1970s. Our analysis is guided by the question of whether social policy development has been dominated by continuity or by change. In contrast to numerous accounts which focus on individual arenas within the welfare state, we argue that we have indeed been witnessing substantial overall policy changes. We characterise the German welfare state as one which has been undergoing a dual transformation. Furthermore, we demonstrate how the theories traditionally used to explain welfare state development, namely, socio-economic, institutional, and the ‘parties matter’ theories, cannot sufficiently account for the nature and direction of Germany’s social policy changes. Finally, we identify the emergence and eventual dominance of new interpretative patterns within the political discourse as the primary cause for the substantive policy changes. The initial idea for this book originated in the late 1990s, at a time when both of us were working on different research projects at the Centre for Social Policy Research (CeS) at Bremen University (Bleses/ Seeleib-Kaiser 1998; 1999). Our collaborative work was put to the test as we both left the CeS only shortly after the idea was hatched. From 1998 to 2002 Peter Bleses worked at the Institute of Sociology at Leipzig University, before joining the Law Department at the University of Oldenburg. Between 1999 and 2002 Martin Seeleib-Kaiser was DAAD Associate Professor of Political Science and Sociology at Duke University, Durham (North Carolina), before once again joining the CeS and the ix

x Preface

faculty of the Institute of Political Science at Bremen University. These institutions have all provided us with a supportive, stimulating environment within which we have been able to continue our collaborative work. Over the years, so many of our colleagues have contributed tremendously with their insights and comments that it is impossible to name everyone individually. Many thanks to you all. There are three persons we would like to acknowledge individually. Susanne Freytag and Gabriella Faerber tremendously improved our manuscript with their editorial skills; without their help many more Teutonic expressions would have made it into our book. We would also like to thank Alison Howson at Palgrave Macmillan for encouraging us to turn our project into a book. Finally, we are greatly indebted to the Hans Böckler Foundation for their generous financial support. PETER BLESES M ARTIN S EELEIB -K AISER

List of Abbreviations ALMP B90/Die Grünen BGB BGB1 BMAS BMF BMFSFJ

BMGS

BMWA BT-Drs. BVerfG BVerfGE CDU CeS CME CSU DAAD ECJ EMU EU FDI

Active Labour Market Policy Bündnis 90/Die Grünen (Alliance 90/The Greens; Green Party) Bürgerliches Gesetzbuch (Civil Code) Bundesgesetzblatt (Federal Law Register) Bundesministerium für Arbeit und Sozialordnung (Federal Ministry of Labour and Social Affairs) Bundesministerium für Finanzen (Federal Ministry of Finance) Bundesministerium für Frauen, Senioren, Familie und Jugend (Federal Ministry for Women, Elderly, Family and Youth) Bundesministerium für Gesundheit und Soziale Sicherung (Federal Ministry of Health and Social Security) Bundesministerium für Wirtschaft und Arbeit (Federal Ministry of Economics and Labour) Bundestags-Drucksache (Printed matter of the Federal Parliament) Bundesverfassungsgericht (Federal Constitutional Court) Entscheidungen des Bundesverfassungsgerichts (Decisions of the Federal Constitutional Court) Christlich Demokratische Union Deutschlands (Christian Democratic Union of Germany) Centre for Social Policy Research (Bremen University) Coordinated Market Economies Christlich Soziale Union (Christian-Social Union; sister party of the CDU in Bavaria) Deutscher Akademischer Austausch Dienst (German Academic Exchange Service) European Court of Justice European Monetary Union European Union Foreign Direct Investment xi

xii List of Abbreviations

FDP

Freie Demokratische Partei (Free Democratic Party, Liberal Party) GDP Gross Domestic Product IAB Institut für Arbeitsmarkt- und Berufsforschung (Institute for Employment Research) IMD International Institute for Management and Development ISSP International Social Survey Programme MP Member of Parliament OECD Organisation for Economic Cooperation and Development PDS Partei des Demokratischen Sozialismus (Party of Democratic Socialism) SGB Sozialgesetzbuch (Social Policy Code) SPD Sozialdemokratische Partei Deutschlands (Social Democratic Party of Germany) Sten. Prot. Stenografische Protokolle (Minutes of the Federal Parliament) SVR Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (Council of Economic Advisers) VDR Verband Deutscher Rentenversicherungsträger (Association of German Pension Providers)

Introduction

At the beginning of the twenty-first century the Federal Republic of Germany seems to be suffering from a serious disease. Low growth, high unemployment and a swelling budget deficit are said to be the most obvious symptoms. Commentators say Germany’s over-regulated labour market and its over-expanded welfare state, which is financed primarily by social insurance contributions, are the root causes. Politicians and social scientists argue that countries that have been more successful in terms of employment and growth over the past decade, such as the Netherlands, the United Kingdom or the United States of America, have performed better because of their innovative approaches and might therefore serve as models for an overhaul of the German political economy. But despite the presence of potential models, a cure for the German ‘disease’ seems at best elusive. This is because Germany is allegedly caught up in a political blockade and is unable to change.1 The presence of a large number of ‘veto players’ (Tsebelis 2002) within the German political system is often given as the major reason for Germany’s political gridlock. These veto players strengthen policy stability and prevent the government from pursuing a policy of ‘necessary’ reform. In comparative research, Germany is usually characterised as a welfare state that resembles most closely the ideal category of a ‘conservative welfare regime’ (Esping-Andersen 1990). One core element of a conservative welfare regime is a strong emphasis on social insurance. Consequently, Germany has also been categorised as a ‘social insurance state’ (Riedmüller and Olk 1994), in which the standard social risks of workers are covered by an array of different social insurance schemes. Traditionally, the social insurance system differentiates between the various status groups – for example, white-collar and blue-collar workers – thus preserving status differentials. The second core element of a conservative 1

2

The Dual Transformation of the German Welfare State

welfare state regime is its heavy reliance on the family and other communal groups to provide social services. Both elements of the German welfare state are guided by the normative principle of subsidiarity. The principle of subsidiarity has its roots in the social teachings of the Catholic Church. Based on this philosophy, the smallest viable entities of society are responsible for their members. Hence, it seems legitimate to differentiate, for example, between white-collar and blue-collar workers and to emphasise the strong role of families or other communal groups. The role of the state is to protect these entities, and if necessary, to provide the support for them to carry out their responsibilities (Nell-Breuning 1957; Spicker 1991; Waschkuhn 1995). This role stands in stark contrast to the role played by the state in both ‘liberal’ as well as ‘social-democratic’ welfare regimes. In social-democratic welfare regimes, it is the state’s responsibility to provide universal social benefits as well as to deliver social services to its citizens. In liberal welfare regimes, state intervention is residual and primarily focused on providing means-tested benefits to the ‘deserving poor’ (Esping-Andersen 1990; 1999). Taking the relevance of unpaid work within welfare states as a reference point, Jane Lewis (1992; Lewis and Ostner 1994) developed a different typology of welfare state models. Her main criticism was that conventional welfare state analysis did not sufficiently recognise and deal with the relationship between paid as well as unpaid work and welfare. Based on historically dominant normative prescriptions and empirical evidence in western European and North American societies, men were assumed to earn a wage in the labour market, whereas women were considered to be responsible for homemaking and caring for the family. This relationship was coined the ‘male breadwinner model’. According to Lewis and Ostner (1994), welfare states differ in the extent to which this relationship determines social policy. Hence, they developed three categories of welfare states: strong male breadwinner, moderate male breadwinner and weak male breadwinner states. In strong male breadwinner countries, married women are treated as dependent wives with regard to social entitlements. Countries historically belonging to this model vary in the extent to which they provide transfers and services to promote the institutions of marriage and family. Moderate male breadwinner states recognise and promote women as wives, mothers and workers. In weak male breadwinner states, women are defined ‘as workers rather than as wives and mothers’ (Lewis and Ostner 1994, p. 19). In Chapter 2 we will show in greater detail how, historically, the German welfare state closely resembled the ideal category of a strong male breadwinner state.

Introduction

3

To summarise: during the golden era of post-World War II capitalism, social policy in Germany, on the one hand, was based on an explicit ‘wage earner-centred’ (Vobruba 1990) approach of insuring the male breadwinner against standard social risks, while on the other hand, it relied on the unpaid work of women to provide social services within the family. Is this categorisation still valid 30 years after the end of the golden post-war era? If the architecture of social policy in Germany has changed, in which direction has it moved? Can we perhaps even speak of a regime change? Most empirical comparative research, as well as case studies on social policy development in Germany, has largely remained focused on the work–welfare nexus. These studies in general emphasise the slow and very incremental changes in social policy, which are said to be caused by the particular institutional make-up of the German polity, with its two welfare state parties and large number of veto players (Pierson 2001; Siegel and Jochem 1999; Manow and Seils 2000). Yet, a concentrated focus on wage earner-centred social policy programmes, such as early retirement regulations, and various socio-economic outcomes such as low labour force participation rates among elderly (and female) workers, cannot capture the potential overall change in social policy. In this book we will argue that contrary to the notion of a société bloquée, we have, in fact, witnessed a dual transformation of the German welfare state. On a substantive level, we will argue that the dual transformation of the welfare state is characterised by a decreasing emphasis on wage earner-centred social policies and by an increasing emphasis on family-oriented social policies. These reforms are in line with similar developments in many other industrialised countries, characterised by Jane Jenson and Denis Saint-Martin as a development ‘from Ford to LEGO’. In their view, ‘advanced democracies are currently in the process of renegotiating the terms of the post-war social contract . . . It is a movement for re-thinking the blueprints for the very architecture of welfare, that is the respective responsibilities of families, markets, and communities as well as the states’ ( Jenson and Saint-Martin 2002, p. 4). Giuliano Bonoli (2002) discovers a similar trend towards, as he calls it, the ‘politics of new social risks coverage’. Finding ways to reconcile work and family life is central to this approach. Policy instruments include childcare, maternity and parental leaves, as well as services for the frail elderly.2 To address the core question concerning welfare state continuity or change in Germany, our analysis will have to encompass wage earnercentred social insurance and family policies. In order to provide a reference point for our study, we will give a brief analysis of the normative and

4


institutional design of the German welfare state in the golden era of post-World War II capitalism. We will then address the question of social policy change and/or continuity over the past three decades. In the second part of the book we will examine the causes for the policy changes that we have identified. Comparative social science has developed a variety of theories that attempt to explain social policy development and change, for example, theories highlighting socio-economic forces, historical institutionalism, the role of veto players, power resources, partisan politics and political discourse. (For a recent overview see Amenta 2003.) We will scrutinise the explanatory power of these various theories based on a qualitative analysis of the empirical evidence. We will argue that the main cause of the dual transformation of the German welfare state was the construction of new dominant interpretative patterns among the political elite – namely, that the policy change was primarily caused by a significant change in the political discourse. This is not to say that the various other theoretical explanations have no value. Indeed, they play an important role in the development of the new interpretative patterns. Starting in the 1970s, political decision makers found it necessary to stop further increases in the level of social insurance contributions and eventually even to reduce contribution levels. This was considered necessary because of the adverse effects of high contribution levels on the economy and especially on employment growth. This policy gained further momentum in the 1990s. The alternative – shifting the financing mechanism of social policy more strongly towards taxation – is also argued to be limited in times of globalisation.3 The only other option available was to curtail benefits. At about the same time, however, policy makers started to realise that the family had been previously neglected by the various social policy arrangements. Thus, expansions in the realm of family policy were considered to be justified and necessary, even at a time when other social programmes were being retrenched. At this stage, readers might ask why we did not choose an international comparative approach to our analysis. There are three reasons for this. In the first place, a case-study approach enables us to illuminate the complexity of the German welfare state and to offer an in-depth analysis of potential changes and their causes. This would not be possible if we used a comparative approach (Rueschemeyer 2003; Nissen 1998). 4 Secondly, from a theoretical point of view, the German case is of interest because in comparative research Germany is identified as the case which most closely mirrors the features of the ideal conservative welfare state regime. A substantial social policy change in Germany might require us to reconfigure our conceptualisation of welfare state regimes. But

Introduction

5

the theory of path dependency, as well as the veto player theory, suggest that such a change would be most unlikely (Pierson 2000; Tsebelis 2002). Hence, Germany might be considered as a ‘crucial case’ – in other words, a case in which a theory most likely to hold if it is valid anywhere might be falsified (Eckstein 1975; Hall 2003, pp. 295 ff.). Finally, we have allowed our case study design to be guided by a pragmatic approach – namely, we have asked the question whether Germany is indeed unable to reform its social policies, as many commentators have suggested. Most of the research published in English about the German welfare state relates to specific features or social policy programmes. A comprehensive analysis of German social policy development over the last 30 years has not yet been published.5

Part I The Policy Dimension

1 Evaluating Policy Change: Some Theoretical and Methodological Remarks

The primary contribution of welfare state regime theory has been to explain differences between various clusters of welfare states (EspingAndersen 1990, 1996, 1999). Yet, if a regime can be defined as a setting of specific institutional arrangements and processes based on generally accepted norms, we have to analyse whether once-dominant arrangements and norms still guide current social policy development. First, we must define a reference point and a time frame, which will enable us to detect potential changes. We have chosen the mid-1970s as a starting point for our analysis since they mark the end of the so-called ‘golden era’ of welfare state capitalism. Secondly, we need specific tools or categories which will allow us to judge whether the many policy developments we have witnessed over the past three decades constitute a significant change. A majority of welfare state theorists assume that welfare state development generally follows a path-dependent pattern, with significant policy changes therefore very unlikely. The theory of path dependency is built upon the assumption that institutional arrangements which are implemented at the right time can be followed by a process of increasing returns, that is, the institutional arrangements become self-reinforcing. Hence, a particular institutional arrangement is said to become largely resistant to change. A critical juncture or a punctuated equilibrium is necessary to overcome forces of resistance (Pierson 2000). Accordingly, the theory of path dependency leads us to expect that a substantial policy change is very unlikely. In the case of Germany, this would preclude any deviation from the conservative welfare state regime or the strong male breadwinner model. But what constitutes a policy path? The definition of a policy path largely depends on the specific level of adequacy and abstraction that social scientists choose for their analyses (Schimank 2002). Therefore, 9

10


the definition of a policy path differs depending on whether we analyse specific programmes, the architecture of a specific welfare state, or differences between welfare states. Furthermore, we could analyse the policy path from the perspective of benefits or financing, in which case our chosen approach would also, a priori, make a difference to how the policy path is defined. Literature dealing with path dependency often presents ex post facto examples of successful path dependent developments to support the theory itself. The most famous of these examples is probably the continued use of the QWERTY keyboard (Pierson 2000). However, in order to make a convincing case, the theory needs to systematically demonstrate the conditions for non-path dependent changes. Why is it that completely new product lines are introduced at the same time as older product lines witness a process of decreasing returns? 1 The real political world is also full of changes which show an adjustment to newly-perceived problems and circumstances, yet the theory of path dependency fails to adequately explain these. One such example from German politics is the decision to end the use of nuclear power and promote renewable energy sources. This decision clearly cannot be explained with path dependency. We are not suggesting that history does not matter, but the hard question is when, under what circumstances, and to what extent, does history matter? In principle, the concept of path dependency depends on long historical time frames. If these long historical time frames are necessary, how then can political science evaluate current or recent policy developments with any validity? Many recent or current changes may seem path dependent, although theoretically it could be possible that the sum of the many small changes over a longer period of time could lead to the establishment of a new policy path, without a clearly identifiable critical juncture. Hence, the theory of path dependency does not seem very helpful in answering the questions we are trying to address in this book. Welfare state change and continuity could be measured by employing a variety of approaches. We might analyse whether we witness overall welfare state expansion or retrenchment based on aggregate spending figures. Although these figures might give us a general impression of state intervention, they cannot, per se, provide sufficient information about the implementation of specific changes. Depending on the extent of changes within the demographic make-up of a society, the unemployment rate, or the fluctuation of economic growth rates, the meaning of the data could alter over time (Clayton/Pontusson 1998). Nevertheless, the development of social policy expenditure can serve as a starting point for further analysis. As Baldwin (1990) has discussed at great length,

Evaluating Policy Change

11

Table 1.1: Modes of social policy intervention based on the work–welfare nexus Universalism

Social insurance

Social assistance

Eligibility Financing

Citizens/residents Taxation

Poor Taxation

Benefits

Flat and universal

Workers/insured Social-insurance contributions Contribution-related

Means-tested

the main aim of welfare state provisions has historically been to insure workers against social risks. Hence, key dimensions of measuring continuity or change could be coverage rates, eligibility criteria, and benefit levels in the core risk categories: old age, unemployment and sickness. International comparative and cross-sectional analyses identify three ideal modes of social policy intervention which insure against these core social risks: universalism, social insurance and social assistance (see Table 1.1). Although most welfare states combine these three modes in their individual social policy designs, comparative research shows universalism has been the predominant mode in Scandinavian or ‘social-democratic welfare states’, whereas continental-European or ‘conservative welfare states’ were once dominated by social insurance, while ‘liberal welfare states’ used means testing as the foundation for their social policy design (Esping-Andersen 1990). Social policy change can theoretically alter the once-predominant mode of intervention by transforming a system dominated by social insurance, for example, into a means-tested system. A refined analysis might also consider the decommodification potential of social policy over time. Esping-Andersen (1990, p. 23) defines decommodification as follows: ‘A minimal definition must entail that citizens can freely, and without potential loss of job, income, or general welfare, opt out of work when they themselves consider it necessary.’ Obviously, no country has given its citizens the full autonomy to opt out of work as they might consider appropriate. Moreover, opting out of work has always been dependent on certain conditions, such as sickness, unemployment and old age. These conditions are usually defined by eligibility criteria and benefit levels. 2 Hence, liberalising eligibility criteria and/or increasing benefit levels – thereby reducing the need for workers to rely on the market for income under any circumstances – could bring about an increase in decommodification. Assuming that we witnessed the peak of welfare state expansion in the mid-1970s, we could employ the dimension of decommodification to analyse whether and to what extent the wage–welfare nexus has changed over time. One possibility

12


is that times of fiscal austerity brought about the reversal of a trend. The process of increasing decommodification, which characterised welfare state development in industrialised countries during the golden post-war era, turned into a process of recommodification after the mid-1970s – that is, workers were once again forced to rely more strongly on market incomes (Neyer and Seeleib-Kaiser 1995; Seeleib-Kaiser 1997). The policy analysis must also address the care–welfare dimension. Esping-Andersen (1999, p. 45) introduced the term ‘de-familialisation’ to capture the development of policies ‘that lessen individuals’ reliance on the family; that maximize individuals’ command of economic resources independently of familial or conjugal reciprocities’. De-familialisation can be achieved by two opposing strategies: either by providing public services or through marketisation. If we take the weak male breadwinner model definition of Lewis and Ostner (1994) as our reference point, whereby women are defined as workers rather than as wives and mothers, two strategies of de-familialisation become apparent. On the one hand, de-familialisation can be achieved by a strategy of providing public childcare services, introducing paternal leave policies, and the like. This then allows both parents access to the labour market for income. On the other hand, a strategy of coercive (re)commodification of both parents leaves it up to the market to provide the necessary services. Although it would not result in de-familialisation, another strategy of addressing the issue of welfare and work might be for the state to give both parents a choice between work and child-rearing or a combination of both. This strategy would be subject to a necessary condition which would serve to safeguard the state against a full withdrawal of both parents from the labour market. No matter who works, the time committed to work by both parents should add up to at least one full-time position. Such a strategy would have to be based on gender equality in the workplace, re-employment options for the care-giver, and a guarantee of relatively high wages. It might even be characterised as a liberalisation from gender roles ascribed by a traditional division of labour, while at the same time giving parents the option to care for their children themselves rather than having to rely either on the state or on the market. Finally, a combination of changes along the work–welfare and/or the care–welfare dimension can lead to substantive changes in the welfare state. Retrenchment in the work–welfare dimension might go along with an expansion of social policies towards greater de-familialisation or vice versa, or we might even witness an overall social policy retrenchment along both dimensions. In this context it is essential to note the importance not only of current transfer benefits and services, which may be

Evaluating Policy Change

13

easily measured quantitatively, but also of legal entitlements which regulate the labour market, or future benefit entitlements. Our analysis of policy change is informed by a conceptualisation proposed by Peter Hall (1993). He differentiates between ‘first’, ‘second’ and ‘third-order changes’. Hall defines a first-order change as a change in the setting of instruments according to changed circumstances, for example, an increase in the cost of living adjustment in an entitlement programme based on the inflation rate. A second-order change is defined as a change of instruments, while the overall aims of a policy remain the same. Finally, we can speak of a third-order change if the overall aims and instruments of a policy are newly defined and thus eventually constitute a new ‘institutional logic’ (Deeg 2001, p. 36). It follows from these remarks that the complexity of modern welfare states forces us explicitly to define a point of reference. In the following analysis, the German welfare state as configured in the early 1970s will serve as our reference point, allowing us to ascertain change and/or continuity in the welfare state. Our analysis will mainly focus on the normative aims and goals associated with eligibility criteria and levels of benefits, as well as on the ascribed roles of adults relating to labour market participation. Our in-depth analysis is based on key changes in the old-age insurance system, labour market and family policies. We have chosen this approach because historically, the main goal of social policy was to insure workers against social risks, while relying on the family to provide unpaid social services. We will discuss the historical and normative dimension in greater detail in Chapter 2.

2 Historical, Normative and Institutional Foundations of the German Welfare State in the Golden Post-World War II Era

In many countries the foundations for the modern welfare state were laid in the 1930s and 1940s. In Germany key normative and institutional foundations were, however, already established by the late nineteenth century. Since history does matter, we consider it necessary to present a brief account of historical developments in Germany up to 1945 in order to better understand the normative and institutional design of social policy in the golden era of welfare state capitalism. Building on this overview, we will then address the normative and institutional foundations of Germany’s social policy in greater detail, as they represent the reference point for our policy analysis in the following chapters.

2.1

Historical background

In the 1800s Germany’s rapid industrialisation propelled the problems associated with the risks of workers to the forefront of state activities and eventually contributed to the legislation of statutory social insurance schemes in the second half of the nineteenth century. Private and mutual self-help insurance systems had already been established prior to state legislation, but these insurance schemes were viewed as relatively ineffective. Due to their low wages, the majority of workers could not afford to pay the necessary premiums for coverage in private or mutual self-help systems. Furthermore, these systems did not guarantee that benefits would definitely be paid in times of need (Tennstedt 1981, pp. 165 ff.; Reidegeld 1996, pp. 150 ff.). In 1881 Emperor Wilhelm I unveiled an initiative to create a statutory social insurance system. His decision was based on Germany’s mounting social problems and the low effectiveness of private and mutual self-help 14

Foundations of the German Welfare State

15

social insurance schemes as well as on the aim of the state to (re)gain and maintain the loyalty of the (increasingly organised) working class (Wehler 1980, pp. 135–41). In 1883, just two years after the emperor’s proclamation, Germany legislated a statutory sickness insurance system. This was followed by the creation of a relatively large number of statutory sickness insurance funds. These funds were financed by equal contributions from employers and employees. In addition to covering medical services, the benefits of the sickness insurance schemes also included low cash payouts as rudimentary compensation for loss of income during sickness. The success of this initiative is highlighted by the rapidly increasing rate of medical coverage throughout the population. Before the passage of the law, only about 5 per cent of the population were covered against sickness. By 1913 about 50 per cent of the population were covered. The rapid increase in the rate of coverage among the population in such a short time resulted from the free coverage extended to the dependants of insured workers (Bleses and Seeleib-Kaiser 2001, p. 1768). The old-age and disability insurance law was introduced in 1891, with compulsory membership for all blue-collar workers. As well as drawing on contributions from workers and employers, and contrary to the sickness insurance schemes, the old-age and disability insurance law was subsidised by the state. Retirement benefits were based on the principle of actuarial equity – that is, retirees who had earned lower wages and therefore contributed less to the insurance system during their working life also received lower retirement benefits than retirees who had commanded higher incomes. This principle therefore extended wage differentials into the retirement system, although these differentials were ameliorated through the worker’s entitlement to minimum benefits (Döring 1987). The retirement age was set at 70 years. The implementation of the old-age insurance scheme meant that the state, in principle, introduced a ‘work-free’ period at the end of the (male) life course. However, the average male life expectancy of that time and the initially very low retirement benefits meant that very few workers could actually enjoy their retirement. Twenty years on, an additional old-age insurance system was introduced for salaried white-collar workers. The main differences – compared to the insurance system for blue-collar workers – were a retirement age of 65 and the introduction of general benefits for widows. The widow of a blue-collar worker, on the other hand, was only entitled to survivor’s benefits if she was fully disabled (Tennstedt 1981, pp. 181 ff.; Reidegeld 1996, pp. 218–41). If we use total social policy expenditure as an indicator, the state’s monetary input was, however, still quite small, despite these expansions. At the turn of the twentieth

16


century, the government spent about 1 per cent of gross domestic product (GDP) on social policy. Total government expenditure amounted to 12.9 per cent of GDP (Flora et al. 1983, p. 384). With the institutionalisation of the social insurance system at the end of the nineteenth century, the German empire had become an international pioneer in social policy innovation. An exception to this development was the relatively late institutionalisation of an unemployment insurance system. For a long time, the risk of unemployment had been perceived to be uninsurable. During the Weimar Republic this perception changed and an unemployment insurance system was finally introduced in 1927.1 Like the other social insurance schemes, the unemployment insurance scheme was financed by contributions from both employees and employers. And again, benefits reflected wage differentials. However, in times of economic crisis this contribution-based financing mechanism posed a much higher potential threat to the financial viability of the unemployment insurance scheme than to the financial viability of the other branches of the social insurance system. As the number of unemployed skyrocketed with the onset of the Great Depression, contributions to finance the unemployment insurance system fell short. And since the state refused to subsidise the system adequately out of general revenues, unemployment benefits were drastically cut only a few years after the unemployment insurance system had been introduced (Adamy and Steffen 1982; Berringer 1999). The historical institutional development described thus far primarily addresses the wage–welfare nexus for male breadwinners. In the following section we will therefore address the issue of unpaid work and welfare (services), since this constituted the flip side of the wage-welfare system. This is largely the story of defining the role of married women in society as housewives and care-givers for children and the elderly. This was partly achieved by entitling the wife (as well as the children) to social insurance benefits derived from the husband’s employment contract. The role of married women was explicitly codified in the Civil Code, which was drafted in the 1870s and 1880s and which came into effect in 1900. Based on the Civil Code, husbands had extensive and explicit ‘rights’ over their wives. A wife could only enter the labour market if she had the explicit consent of her husband. Furthermore, she was legally obliged to take care of the household duties. 2 The legitimacy of these institutional arrangements was rooted in the conception of the family as the ‘organic basis of state and society’ and the ‘foundation of morality and education’. Family relationships – as codified in the Civil Code – were said to originate in the ‘natural order of relationships’ (Moeller 1993, pp. 47–8).


17

Daily life was, however, very different from the codified bourgeois ideal of the ‘non-working’ mother. More and more women entered the labour force during the late nineteenth century. This was especially the case for the wives of blue-collar workers, who were forced to contribute to the family income out of economic necessity. A key argument against the wage labour of mothers was that it would be detrimental to the morality and health of the children (Rosenbaum 1982, pp. 402–12). Although the Weimar Republic formally accepted the principle of gender equality in the public sphere, the ‘private’ role of women within the family – as codified in the Civil Code – remained unchanged (Moeller 1993). Under the Nazi-terror regime, the institutional shell of the social insurance scheme remained largely intact, although the regime did introduce parts of its racist and fascist ideology into the social insurance system. In this vein, the state introduced child allowances for large families in order to support and strengthen the German Volksgemeinschaft. Finally, the Nazis – in addition to using terror – employed a range of instruments of social policy to increase loyalty – or at least tolerance – among the people in order to stabilise the regime (Reidegeld 1993, p. 328; Hockerts 1998). The liberation of Nazi Germany by the Allies opened a window of opportunity for a comprehensive social policy reform. Many saw Germany’s liberation as ‘Stunde Null’, meaning, in essence, that society had the opportunity to create something new, or start from scratch, without reference to former institutional arrangements. The principle of Stunde Null did not, however, apply to the field of social policy. Although the Allied forces initially proposed integration of the fragmented social insurance schemes into one ‘unified insurance’ according to the principle of ‘social citizenship’ (Marshall 1963), social policy was largely characterised by the restoration of the old institutional set-up. The Allied initiative was in tune with the British Beveridge Plan, as well as with similar social concepts discussed by the French parliament at that time. However, a majority of German political players opposed the proposed plan. As the Cold War started to heat up, the Allies did not continue to insist on implementing a comprehensive social reform. Eventually, the pre-war social insurance system was restored through the enactment of the Social Insurance Adjustment Law of 1949 (Hockerts 1980).

2.2

Norms and institutions

The historical developments outlined above led, on the one hand, to a wage earner-centred social policy – applying de facto largely only to

18


male breadwinners – dominating the design of the post-World War II German welfare state, and on the other hand, to a sphere of unpaid welfare work provided by married women. From a sociological perspective, the wage earner-centred social policy is rooted in the general acceptance of specific normative preconditions. First, the worker must be accepted as an insurable individual; in other words, he is no longer seen as part of an anonymous proletariat. Second, the risks to be insured must, in principle, not be perceived as being attributable to any fault of the individual, despite the fact that the risks affect workers individually. Following on from these two preconditions is the conditio sine qua non whereby an individual cannot freely choose between income from work and social income. Moreover, persons of working age must effectively demonstrate that they are willing to work in order to receive social benefits. Finally, the level of social income to which the individual is entitled is based on his prior wage earnings, thereby extending wage differentials – a result of market mechanisms – into the realm of social insurance benefits.3 Based on these normative preconditions, only the standard social risks of wage earners can be effectively insured. We need a reference point in order to be able to infer and define these standard risks and this is based on assumptions of what constitutes a ‘standard employment relationship’ (Mückenberger 1985). These assumptions can be listed as follows: (1) work is carried out as dependent work with a single employer; (2) work is full time; (3) remuneration is higher than the subsistence level; (4) employment history is continuous as well as sufficiently long, at most interrupted by only short spells of unemployment; (5) the life course follows the education–work–retirement track; (6) the income and the social policy status of the housewife as well as of the children are derived from and are dependent on the status of the male breadwinner. The standard employment relationship was not only perceived to be a normative goal, but also implicitly acknowledged to reflect reality. In short, the wage earner-centred approach is based on the following theorems: (a) the individual must first work before he is entitled to receive social benefits; (b) these social benefits are based on the level of his previous earnings; and (c) while the individual is receiving social benefits – obviously with the exception of retirement benefits – he is required to constantly demonstrate his willingness to work (Vobruba 1990, pp. 31–2). Following on from the logic of this approach to social insurance, only people unable to meet these criteria – generally through no fault of their own – should, in times of need, have to rely on taxfinanced social assistance benefits. This normative design of the German welfare state clearly emphasises the historically-rooted differentiation


19

between social policies for workers and social policies for the poor (Leibfried and Tennstedt 1985). Theoretically, such a social policy design can only function as a means of overall social integration as long as the majority of workers are in standard employment relationships and the economy generates full employment. At the same time, such a social policy design provides workers with ‘economic’ incentives to achieve in the labour market and thereby indirectly promotes long-term economic growth. Titmuss (1974, p. 31) has characterised this approach to social policy as the ‘industrial achievement-performance model’. It incorporates social policy institutions as ‘adjuncts of the economy’ which are guided by merit, work performance and productivity. Following on from these norms, the foremost aims of the German social insurance schemes were inter-temporal redistribution within the life course (not inter-personal redistribution), and the entitlement of derived benefits to family members. The leitmotiv of post-war social policy expansion was to secure the ‘achieved living standard’ of the male breadwinner and his family during old age, disability, sickness and unemployment. This evaluation of social policy aims is supported by the fact that, despite some initial differences, both the Christian Democratic Party (CDU) and the Social Democratic Party (SPD) supported and voted for the key legislative bills of wage earner-centred social policy, namely, for the pension reform of 1957, the introduction of statutory sickness benefits, and the major reform of labour market policy in the late 1960s. Hence, both the CDU and the SPD have been characterised as ‘welfare state parties’ (Schmidt 1998). Pension reform The pension reform of 1957 is the prime example of how the social insurance system aimed to guarantee that a worker be able to maintain the achieved standard of living during retirement. The pension reform raised the old-age benefits on average by about 65 per cent and indexed them to future increases in gross wages. In this way, retirees would benefit from any future increases in living standards which unions had subsequently achieved through collective bargaining. In short, pensions were locked to the development of gross wages (Schmähl 1999; Schmidt 1998, pp. 81–4; Frerich and Frey 1996, pp. 46–9). The central aim of the 1957 pension law was – in the words of Josef Schüttler, a CDU politician and responsible committee correspondent to the German Parliament – ‘to achieve a clear distinction between insurance and social assistance . . . [The old-age insurance] was to be transformed from a minimal allowance of the past into a benefit for the future which could maintain the living

20


standard’ (Sten. Prot. 2/184, p. 10181). Following the implementation of the law, senior citizens could increasingly rely primarily on their oldage insurance benefits, whereas before a substantial segment of senior citizens were dependent on means-tested social assistance (Leisering and Leibfried 1999). In addition to reconciling various other existing differences between the old-age insurance schemes for white-collar and blue-collar workers, the 1957 pension reform introduced a special occupational insurance disability benefit for all workers certified as unable to work in the specific occupation in which they had been previously employed or for which they had been trained. Although a higher disability benefit was available to fully-disabled workers, the special disability benefit clearly emphasises the importance of status and occupational protection within the old-age and disability insurance system. It must, however, be noted that the disability benefits would only be payable on a permanent basis after measures to rehabilitate the disabled worker back into the labour market – through medical or other interventions – had failed. Furthermore, based on the assumption that it would be extremely difficult for older, unemployed workers to find status-equivalent re-employment, the government introduced an ‘early’ retirement age of 60 years for those workers who had been unemployed during the previous year. 4 Although the insurance funds of white-collar and blue-collar workers were organisationally kept as two separate entities, the 1957 reform in essence created equal benefit and financing structures within the old-age and disability insurance systems for the two groups. Pension benefits for male workers rose sharply as a result of the generally healthy performance of the economy and the wage increases negotiated by workers in the 1960s and early 1970s. In addition to the gains secured through wage increases, politicians legislated a further significant pension reform in 1972, which increased the pension payments to former low-income workers.5 Between the 1950s and early 1970s, annual pension increases oscillated between 5 per cent and 10 per cent (Alber 1989, p. 84). By the mid-1970s, the net-income replacement ratio reached 70 per cent for a standard pensioner (Eckrentner), a person with a prior average income and a work history of 45 years (Schmähl 1999, p. 405). This level of wage replacement symbolises the core aim of the old-age and disability insurance scheme – namely, to guarantee that the insured person maintains the same standard of living during his retirement as he enjoyed during his years of employment. The overall success of the reformed pension insurance system was highlighted by the decreasing proportion of senior citizens dependent on social assistance.


21

Insuring unemployment If we examine the institutional arrangements for insuring against the risk of unemployment, we uncover a similar design: the unemployment insurance system was normatively bound to insure the worker’s standard of living should he lose his job. This normative view dominated the political debates as well as the various policy measures up until the mid-1970s. In the late 1960s, for example, even members of the Liberal Party (FDP) in parliament supported substantial increases in the level of unemployment benefits. Once again, the unemployment benefit was intended to replace wage income and was supposed to be clearly separate from social assistance benefits. In 1967, a legislated 15 per cent rise in the unemployment benefits increased the unemployment compensation for workers with families up to 80 per cent of prior net wages. Politicians at the time argued that the high benefits would not disincline workers to search for a new job. Moreover, they maintained that the majority of workers had proven their strong work ethic in the past and that unemployment was caused by economic circumstances (Sten. Prot. 5/95, pp. 4335 ff.). The major aim of the 1969 Labour Promotion Law (Arbeitsförderungsgesetz) was to introduce crucial elements of active labour market policy such as training and retraining, as well as a retraining allowance. The retraining allowance granted a higher replacement income than the regular unemployment insurance benefit in order to give unemployed workers an incentive to upgrade their skills during spells of unemployment. The active labour market policy was also aimed at abolishing ‘substandard’ employment. By the mid-1970s, the replacement income for those individuals receiving the regular unemployment insurance benefit reached 68 per cent of prior net earnings.6 This level was to ensure a relatively stable income for workers during spells of unemployment. ‘Suitable work’ was defined in such a way that an unemployed worker did not have to accept a job which either paid less or was in a different occupational field to his previous job (Sengenberger 1984, p. 334; Clasen 1994, p. 101). To outside observers, generous unemployment insurance with the goal of guaranteeing the former living standard of an unemployed person – especially the inclusion of the ‘suitable work’ clause – may seem like a disincentive to work, but as Estevez-Abe et al. (2001) argue, a generous unemployment insurance system has served an important purpose for the German political economy. Without a generous unemployment insurance system, workers would under-invest in the sector-specific skills so crucial for the viability of the coordinated German market economy. That is, if workers are compelled to accept job offers outside their core competencies,

22


either because of low benefits or due to a strict requirement to accept almost any job offer, the workers’ incentives to invest in industry-specific skills are undermined (Estevez-Abe et al. 2001, p. 152). To summarise: active labour market policy was conceptualised as a supply-side instrument for constantly upgrading the skills of the labour force, and not as a demand-side instrument for providing state-financed jobs for the unemployed. The goal of the active labour market policy was to re-integrate the worker into the labour market on the basis of a standard employment relationship. Since unemployment was generally perceived to result from technological and structural changes in the economy and not because an individual had personal reasons for not working, an unemployed person would be entitled to receive benefits to enable him and his family to maintain their former standard of living during spells of unemployment. The socio-economic context for the various labour market policy reforms was an extremely low unemployment rate. Due to the effects of the German ‘economic miracle’ in the 1950s and 1960s, unemployment fell sharply, reaching an average level of 0.7 per cent between 1964 and 1973 (Seeleib-Kaiser 1996, pp. 126–7) – hence, Germany was able to boast a full-employment economy.7 High unemployment, which characterised the economic situation of the 1930s as well as the immediate post-war era, seemed to be a problem of the past. Although a mild economic recession in 1966 and 1967 led to a renewed increase in unemployment, the unemployment rate reached ‘only’ 2.1 per cent at its peak. Furthermore, the economic downturn was short-lived: the unemployment rate, as well as the absolute number of unemployed workers, declined rapidly (see Figures 3.2 and 3.4 below) and full employment was achieved once more. Sickness insurance and the extent of fringe benefits After strikes in the shipbuilding industry in the mid-1950s, sickness insurance became statutory for all blue- and white-collar workers. In 1969, a further reform made it obligatory for employers to pay 100 per cent of a worker’s prior earnings during the first six weeks of his sickness. After that, sickness insurance funds would pay 80 per cent of the worker’s prior wage for the duration of his illness.8 As in the case of old-age and unemployment insurance, these statutory regulations reflect the important role of guaranteeing the standard of living within the post-World War II social compact. Despite a long tradition in Germany, fringe or occupational benefits provided by employers played only a minor role in insuring workers against social risks. Although a relatively high proportion of workers and employees had some form of occupational old-age benefit,


23

the benefit amounts were rather small. The minor importance of fringe benefits is underlined by a comparison of the amounts spent through the two systems. In 1970 the outlays for occupational old-age benefits amounted to 3.1 billion German marks, compared with 52.2 billion German marks for statutory benefits (see BMAS 1994, p. 254). Social assistance for the few Social policy experts in the golden era of post-World War II capitalism were of the opinion that an improved social insurance system would eventually cover the standard social risks of workers to the point whereby social assistance in terms of providing a minimum existence would ultimately become residual (Giese 1986). Although the reformed social assistance law of 1961 entitled individuals to a minimum cash benefit, it was not designed to cover general risks, but primarily to focus on helping persons with individual problems living on the fringes of society. Shortly before the social assistance law was enacted, Alfred Müller-Armack, the architect of the ‘Social Market Economy’ (Soziale Marktwirtschaft), proclaimed: ‘In this classless society, status and class are not the problem anymore, but the individual.’9 This attitude towards social assistance clearly underscores the importance of insuring against standard social risks and using the various social insurance systems to guarantee the worker’s standard of living. Based on the relatively low number of people claiming social assistance and the positive economic climate of the late 1960s and early 1970s, benefit levels were increased significantly, and eligibility restrictions as well as work rules for the ‘employable poor’ were liberalised (Adamy and Naegele 1985, pp. 97–100). The role of women in society While most western European and North American welfare states of the 1950s can be categorised as ‘patriarchal welfare states’ (Pateman 1988), the division of labour between the sexes was most clearly institutionalised in the ‘strong male breadwinner model’ welfare state. Germany fit squarely into this category (Lewis and Ostner 1994). Hence, the architecture of the German welfare state in the golden post-World War II era was not only based on insuring against the standard risks of wage earners, but was also anchored in preserving the functionality of an ideal standard family. A standard family in the 1960s consisted of the male breadwinner, his ‘non-working’ wife, and two or three children. It was considered the responsibility of the state to protect this institution. Single-parent families or same-sex partnerships were perceived as aberrations and therefore stigmatised. Through the institution of the family, the housewife and

24


dependent children were entitled to social insurance benefits derived from the male breadwinner’s employment relationship (Herlth et al. 1994). The normative view, which had its roots in the late nineteenth century, held that it was the ‘natural’ role of mothers to care for their children. This view still guided parliamentary deliberations on the equality of women in the workplace as well as the introduction of child allowances in the 1950s (Moeller 1993). Since it was the responsibility of the ‘nonworking’ mother to provide the necessary social services for family members,10 – thereby forgoing paid employment – the male breadwinner’s wage had to be high enough, in principle, to support the whole family above the subsistence level. In the late 1940s and early 1950s, pay was generally based on merit within a system of collective bargaining agreements. But many of these agreements in the manufacturing, mining and public sectors included additional allowances for children. With a few regional exceptions, wages based on these contracts were sufficient to lift an unskilled male breadwinner and his family above the social assistance level as long as there were no more than two children in the family (Achinger et al. 1952, Tables 10, 15, 17). It was feared that higher wage supplements by employers for workers with larger families would result in discrimination in hiring and dismissal of these workers (Achinger et al. 1952, p. 45). Although the dominant Christian Democratic Party (CDU) was the primary promoter of the ‘natural’ role of mothers, the division of labour was also explicitly and widely accepted by the Social Democratic Party (SPD). This became obvious not only in the parliamentary debate on the introduction of a child allowance, but also in key policy statements by female Social Democrats. In the view of Elisabeth Selbert, a Social Democratic politician and one of four female representatives in the Parliamentary Council, ‘[e]quality could also be achieved by recognising that the unpaid labour of wives and mothers in the home was equivalent in value to the wage work of fathers and husbands’ (Moeller 1993, p. 73). In 1954 Herta Gotthelf, the Director of the Office of Women’s Affairs within the Executive Committee of the SPD, stated at a party convention, ‘to be a housewife and mother is not only a woman’s natural obligation but of great social significance’ (cited by Moeller 1993, p. 129). This general conviction, coupled with the reality of men returning from war and demanding their previous jobs back, forced many female workers out of the jobs they had taken during the war. In 1950 only about a quarter of all mothers with children under 18 worked, and the overall employment rate of women of working age was 44 per cent (Kolbe 2002, pp. 448 f.). If a mother had young children, employment


25

outside the family or outside the family business was only considered legitimate if the woman was forced to work out of economic necessity. Public opinion analysis at the time suggests that the majority of women who pursued work outside the home did so out of economic necessity and would rather have stayed at home if they had had the option. 11 Protecting the family Politically, the dominance of this belief system led Social Democrats and Christian Democrats to agree on a general policy goal, whereby families should be supported in such a way that a mother should not have to work out of economic necessity (SPD 1952/54, p. 618; CSU 1957, p. 618). Yet the two parties were at odds over how to achieve this goal. Whereas in 1950 the SPD demanded a state-financed child allowance for every child, the CDU insisted on a contribution-based child allowance system for families with three or more children (Frerich and Frey 1996, pp. 115 f.). Franz-Josef Würmeling, CDU Minister for Family Affairs, argued in parliament that the proposed child allowance would not constitute a public welfare payment, but rather an allowance which was to be considered part of the worker’s overall remuneration (Stenogr. Prot. 2/44, p. 2119). The Social Democrats insisted that each child, including children of parents not engaged in wage labour, should be entitled to a child allowance and that the benefit should not be considered part of the worker’s remuneration, but rather as an expression of support for the individual child and the family. The Social Democrats further argued that the CDU proposal would have negative effects on certain families. For example, a widow who was solely responsible for child-rearing would have to take up insured employment in order to receive the benefit as proposed by the CDU, even if this meant reducing the time she was able to commit to bringing up her children (Sten. Prot. 2/44, p. 2117). In 1954 the CDU-led coalition government successfully legislated for a child allowance system financed by contributions from employers. The financing mechanism, as well as the key eligibility criteria, whereby only families with an employed parent and with three or more children would be entitled to receive a benefit, demonstrated the underlying notion of the child allowance as constituting part of the overall remuneration. Thus, the family wage became a constitutive part of the wage earner-centred approach to social policy. In 1955, in a bid to dispel any charge of unfairness, the child allowance was extended to all parents – namely, to non-working parents, entrepreneurs and domestic workers – with three or more children. Moreover, only a few years later, a tax-financed, means-tested child allowance was

26


introduced for the second child. In 1964 the CDU finally accepted the concept – initially proposed by the Social Democrats – of a unified statefinanced child allowance that was to be paid out by the Federal Employment Service.12 Nevertheless, the concept of a family wage was kept alive through the beneficial tax system, allowing for joint taxation and a ‘splitting system’ for married couples. The ‘splitting system’ for married couples works in the following way: the income of both partners (even if there is only one income) is added together and then divided by two. The regular income tax is calculated based on this amount and then multiplied by two. The result of this equation would then be the amount of the income tax due. Based on this splitting system and the progressive nature of the income-tax code, a married couple has a tax advantage compared to a single person or to non-married couples with the same gross income. Many perceive this system as supporting the male breadwinner approach through state subsidies (Dingeldey 2001, p. 204; see also Montanari 2000, pp. 312–17). The dominant view among Christian Democrats – based on the principle of subsidiarity – was that the state should not interfere in the internal affairs of the family. According to the Christian Democrats, a key responsibility of the family was to bring up the children, while the state was responsible for protecting the family as an institution. With regard to children, the state’s primary function was to provide formal education. Many at the time considered state childcare facilities to be harmful to the personal development of children, especially pre-school children. State childcare was even widely viewed as an attempt to ‘rob parents of their children while forcing women into wage labour . . . Any mention of group day care was also associated with the Nazis, who shared the communists’ goal of transforming children into loyal servants of the state’ (Moeller 1993, pp. 176 f.). Starting in the 1960s, politicians slowly began to accept the family model developed by Alva Myrdal and Viola Klein (1956). According to this model, a woman would take a 15–20-year career break after having a baby. Although this marked a small shift away from prior normative understandings concerning the role of women in the labour market, mothers were still considered to be responsible for the care of the children. Because women with small children were expected to fulfil their role as mothers, it seemed impossible to expand female labour force participation significantly in the 1960s, even though Germany’s booming economy was crying out for workers. Employers and the state opted instead to recruit ‘foreign guest workers’ to accommodate the demands of the growing economy.13 In the early 1970s fewer than 1 per cent of all children below the age of three and about 30 per cent


27

of children between the ages of three and six had access to publicly financed childcare.14 Yet, the low provision of public social services seemed to be justified – based on the dominant normative views – despite the increased participation of women in the labour force.15

2.3

Summarising the social policy concept

During the golden era, social policy intervention by the state was characterised mainly by statutory insurance schemes which aimed to allow the worker and his family to enjoy their former standard of living during the worker’s retirement and during spells of unemployment and sickness. The insurance schemes also provided derived social benefits to the worker’s family members. The decommodifying potential of the social insurance system depended largely on the status of the individual worker in the employment system and on his achievements. Accordingly, one can argue that the social insurance system possessed a built-in ratchet mechanism – that is, the more a worker ‘achieved’ in the labour market, the higher the individual decommodification potential. Theoretically, the level of social assistance benefits constituted the ground floor of the wage structure as well as of the social insurance framework; its practical relevance in a full-employment economy was, however, rather low. Despite its decommodifying potential on a functional basis, a core aim of the wage earner-centred social policy approach – especially the unemployment insurance and the active labour market policies of the late 1960s – was to reintegrate workers and keep them in the labour market until retirement. Hence, on a theoretical level, social policy expansion in Germany did not fit the characterisation of ‘politics against markets’ (Esping-Andersen 1985). Moreover, social policy was understood to be a dialectical process, in other words, a burden as well as an asset for the market economy. Social policy was perceived as an economic factor capable of enhancing the productivity of Germany’s export-oriented economy (Vobruba 1989; Seeleib-Kaiser 2001, pp. 57–9). The family played an important role as the primary provider of social services, which meant that the role of married women was largely limited to that of housewife and mother, the party responsible for providing unpaid welfare work and for bearing and rearing children. Hence, the ‘public’ sphere of the social insurance system was heavily dependent on the hidden ‘private’ sphere of unpaid housework and child-rearing duties. The extent of de-familialisation was very low. Finally, the German welfare state was based on principles of social integration and cohesion, not on redistribution between classes, or the

28


alleviation of poverty (Goodin et al. 1999). As long as society was based on a stable and socially-accepted division of labour between the sexes (Fröhner et al. 1956), the economy generated high growth, standard employment contracts guaranteed a family wage and low unemployment rates persisted, the German welfare state functioned very smoothly.

3 Socio-economic Developments since the Mid-1970s

Economic growth, full employment, the predominance of standard employment relationships for male workers and the overwhelming acceptance by married women of their roles as wives and mothers rather than as paid workers constituted the foundation of the German welfare state. Until the beginning of the 1970s these elements created the impression of being positively interrelated. The overwhelming majority of experts did not anticipate that unemployment as a societal and economic problem could resurface or that the period of full employment would only be short-lived. Moreover, the achievement of full employment in 1960 had led to the widely-held belief that a full employment economy was the norm. Political actors were convinced that economic prosperity and full employment – on the basis of standard employment relationships – could be guaranteed through the correct use of the various instruments of macroeconomic management. Yet, in the mid-1970s the foundations of the German welfare state began to erode, a process which continues to this day.

3.1

Economic discontinuities and the (preliminary) end of full employment

The ‘economic miracle’ in Germany came to an end with the onset of the first oil crisis in 1973. Although Germany managed to revive economic growth relatively quickly compared to other European countries, it could not find its way back to the relatively high growth rates of the 1950s and 1960s. Ever since the second oil crisis in the early 1980s, economic growth in Germany has been rather erratic and low, with the exception of a short period immediately following unification. The average annual growth rates were 7.9 per cent of gross domestic product (GDP) between 29


30

2001

1999

1997

1995

1993

1991

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

1968

1966

Percent of GDP

8 7 6 5 4 3 2 1 0 –1 –2

Year Figure 3.1:

Annual economic growth rates: 1966–2002

Note: Starting 1992, unified Germany. Sources: BMAS (2000, Table 1.2); BMGS (2003a, Table 1.2).

1950 and 1959, 4.3 per cent between 1961 and 1973, 1.8 per cent between 1974 and 1984, and 2.2 per cent between 1985 and 1998 (Conradt 1996, p. 53; Hall and Soskice 2001, p. 20). At the peak of the most recent economic recovery in 2000, economic growth reached only about 3 per cent (see Figure 3.1). With each economic downturn, unemployment rose further, surpassing one million in 1975, two million in 1983, three million in 1993 (now based on the situation in a unified Germany) and four million in 1997. After the number of unemployed dropped below four million in the years 2000 and 2001, it crossed this symbolic threshold again in 2002 and remained there throughout 2003 (Figure 3.2). Only if economic growth rates rise significantly in 2004, may the number of unemployed once again drop below four million. 1 These official numbers, however, do not fully reflect the overall state of unemployment. The official unemployment statistics do not account for those unemployed workers who (1) do not register with the Employment Service, but are willing to work should the labour market situation improve, (2) participate in job training, or (3) exit the labour market through early retirement schemes. The approximately 2.5 million persons who fall into these three categories must be added to the official unemployment count of about four million to give a comprehensive picture of the unemployment situation, bringing the total number of unemployed in 2002 to about 6.5 million (Autorengemeinschaft 2003, p. 2). The causes for the increase in unemployment are multidimensional and cannot be fully elaborated here.2 In high-wage economies with highly regulated labour markets, the demand for labour is largely a function of

Socio-economic Developments since the Mid-1970s

31

5000 4500 4000 3500 1000s

3000 2500 2000 1500 1000 500 2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965

0

Year Figure 3.2:

Number of registered unemployed: 1965–2002

Note: Starting 1991, unified Germany. Source: BMGS (2003a: Table 2.10).

economic growth and productivity. High economic growth coupled with low or moderate increases in productivity will lead to a widening of the demand for labour. Despite lower increases in productivity since the 1970s – compared to the 1950s and 1960s – economic growth has not been sufficient to absorb the increasing labour supply, which grew from 27.3 million in 1973 to 31.4 million in 1991. Since unification, labour force participation has continued to rise slightly, from 40.1 million to 40.6 million workers (see Figure 3.3). The rise in the number of labour force participants is largely the result of the baby boomers’ entry into the labour market, as well as reflecting increased female labour force participation (see below). Unemployment was primarily caused by insufficient and discontinuous economic growth and an increased labour supply, not by technological improvements (Klauder 1999, pp. 49 ff.). In addition to these two leading factors, structural changes towards a post-industrial economy contributed to an increase in ‘mismatch unemployment’.3 One example of mismatch unemployment is the difficulty workers face in finding new employment in the expanding service sector after having lost their jobs in the declining manufacturing sector. This problem is exacerbated by the skill formation within the coordinated German market economy, which relies heavily on sector-specific skills

32


45000 40000 35000

1000s

30000 25000 20000 15000 10000 5000 2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

0

Year Figure 3.3:

Number of labour market participants: 1970–2002

Note: Starting 1991, unified Germany. Source: BMGS (2003a: Table 2.3).

(Hall and Soskice 2001). Furthermore, according to Scharpf (1995), the service sector, which has contributed to large employment gains for low and unskilled workers in other industrialised countries, is underdeveloped in Germany (see also Freeman and Schettkat 2002). The high social insurance costs levied on work, so the argument runs, lead to overall high labour costs, which then negatively affect the demand for personal services. Finally, the high unemployment rate since the 1990s can be explained in part by the economic transformations associated with unification. As is shown in Figure 3.4, the unemployment rates in the two parts of Germany differ significantly. The unemployment rate in the former East Germany rose from an official rate of nearly zero per cent (during socialist rule) to almost 20 per cent in less than ten years, which currently makes it about twice as high as in the western part of the country. Furthermore, it has shown no sign of significant improvement, even as the overall unemployment rate declined in the late 1990s. In addition to the collapse of many companies during the unification process and to structural difficulties in the transformation process, the higher unemployment rate in eastern vis-à-vis western Germany is partially caused by a considerably higher labour supply in the former East Germany (Pohl 2000).4

33

22 20 18 16 14 12 10 8 6 4 2 0 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Percentage


Year Total Figure 3.4:

West

East

Unemployment rates: 1950–2001

Note: Starting 1991, unified Germany. Sources: IAB (2003: Tables 3.6.1 and 3.6.2); BMAS (2002c: Table 2.10).

As Figure 3.4 shows, full employment was only realised for a brief period from about 1960 until 1973. However, continuous high unemployment necessarily leads to severe financial strains on a wage-centred social insurance approach, which eventually might even threaten the whole concept if no measures to curtail benefits or increase revenues are implemented (Vobruba 2000). We will discuss the financial difficulties of the various social insurance schemes and implemented policy changes in Chapter 4.

3.2

The standard employment relationship on the retreat5

In 1970 about 84 per cent of all workers were employed in standard employment relationships, whereas in 1995 only 68 per cent of the workforce possessed such employment contracts (Kommission für Zukunftsfragen 1996, pp. 64 and 70).6 These percentages do not merely reflect certain circumstantial factors, but rather signify an overall longterm trend in which we see a decline in regular and an increase in atypical employment relationships. In the early 1970s the relationship between regular employment and atypical work was 5:1, by the mid-1980s the relationship had dropped to 3:1, and by the mid-1990s it had reached a level of 2:1 (Kommission für Zukunftsfragen 1996, p. 11). The increase

34


in the percentage of atypical employment can be traced to a rise in parttime work, time-limited employment contracts, temporary work and ‘pseudo-’self-employment. Based on OECD statistics, part-time employment is very often said to be underdeveloped in Germany. According to OECD data, part-time work accounted for 16.3 per cent of all jobs in Germany in 1996, whereas the part-time employment ratio in the Netherlands was more than twice that (Ganßmann and Haas 2001, pp. 254 f.). Yet, due to differing definitions of part-time employment, we must be cautious in comparing part-time employment in an international context. Revised national statistics show a significantly higher rate of part-time employment in Germany. According to Bach (2001, p. 6), part-time employment reached 25.6 per cent in 2000, whereas in 1991 the ratio had reached ‘only’ 15.6 per cent. In absolute numbers, about 29.4 million persons were employed full-time and 5.4 million part-time in 1991, compared to 25.7 million and 8.9 million in 2000. A substantial share of the increase in the part-time employment rate can be attributed to improved statistical methods which account for ‘insignificant employment’, as well as to a considerable increase in these jobs. Until 1999 ‘insignificant employment’ was defined as employment of less than 15 hours per week with an income of less than 630 German marks (320 euros) per month. After an interim regulation which lasted until April 2003, insignificant employment has since been defined as employment with a maximum monthly wage of 400 euros (Rose 2003). This new regulation led to a further increase in these jobs by almost one million, bringing the total to 5.8 million in July 2003. 7 Although the employment of workers on a time-limited basis was made easier through the implementation of the Employment Promotion Law of 1985, this kind of atypical employment has not increased much over the years. In 1985 about 8.7 per cent of all workers had time-limited employment contracts, compared to 10.9 per cent in 1998 (Hoffmann and Walwei 2000a, p. 4). Furthermore, although the number of temporary workers8 rose from 121,400 to 357,264 between 1993 and 2001, their overall ratio within the labour force is still relatively small, constituting ‘only’ 1.28 per cent of all employment relationships with compulsory social insurance coverage (Jahn and Rudolph 2002, p. 4). Finally, many observers have identified an increasing trend in ‘pseudo-’ self-employment. Pseudo-self-employment in Germany is defined as work which had been previously carried out as dependent employment under a single employer but which has been ‘formally’ transformed into self-employment, without any changes in the tasks carried out by the newly self-employed. Such a change in status allows the employer to


35

avoid making social insurance contributions. The pseudo-self-employed are fully dependent on a single company and must take instructions from its managers or owners. Herein lies the crucial distinction between pseudoand legitimate self-employment. 9 Because of its illegality, it is difficult to give accurate data estimates on the extent of this practice. Research has therefore often relied on the category of ‘single entrepreneurs without employees’ in its estimates of pseudo-self-employment practices. Employment in this category rose from 3.1 per cent to 4.5 per cent of overall employment during the period from 1988 to 1998 (Hoffman and Walwei 2000b, pp. 2–3). 10 This can only be a crude indicator, since legitimate self-employment in various economic sectors is expanding as well.11 Other atypical work relationships include telecommuting jobs and so-called capacity-oriented employment relationships – that is, employment whereby the time and duration of paid work are determined by the short-term and flexible needs of a company.12 The rise of unemployment in conjunction with the increase in atypical employment relationships obscures the concept of employment and unemployment, especially in regard to those workers, who ‘migrate’ between unemployment and atypical employment (Walters 1996). As emphasised in the previous chapter, the wage-centred social policy approach relies on continuous work in standard employment relationships. Hence, an increase in atypical employment leads to lower social risk coverage, while persons working in these employment relationships generally have higher social risks: • The unemployment and old-age insurance schemes do not (comprehensively) cover all part-time employees; moreover, coverage is largely dependent on total weekly working hours. For example, the statutory unemployment insurance scheme only covers part-time workers with a schedule of more than 15 hours per week and an income above 400 euros – the threshold of ‘insignificant employment’.13 Although employers are obliged to pay contributions of 12 per cent towards the old-age insurance funds for employees with ‘insignificant employment’, such contributions do not, per se, entitle these low-wage workers to old-age pension benefits.14 • Pseudo-self-employment is not covered by statutory social insurance schemes. • Time-limited employment can lead to social problems if the duration of employment is not long enough to have established an employee’s vested rights to social benefits by the end of the employment contract, and the person has not yet found re-employment.

36


• Finally, most types of atypical employment lead to a loss of social insurance revenues, due to the payment of lower or no social insurance contributions compared to the normative reference of the standard employment relationship.

3.3

The end of the strong male breadwinner model?

Labour force participation as a percentage of the overall population has stayed more or less stable for the past thirty years. However, underneath this overall stability we can discern two developments. (1) The male labour force participation rate between 1973 and 2002 declined from 87.2 per cent to 78.5 per cent. This decline was mainly caused by largescale early retirement of male workers. The labour force participation rate of male workers between the ages of 55 and 64 dropped from 75.4 per cent in 1973 to 52.2 per cent in 2002 (OECD 2003a). (2) Female labour force participation increased. Traditionally, the low female labour force participation rate had been a consequence of the strongly institutionalised male breadwinner model. Analysing female labour force participation in 1971, we find a significant drop in participation among women after the age of 24. Until the late 1980s overall labour force participation among women increased only slowly, and perhaps even more importantly, the shape of the curve did not change substantially; that is, the rate of female labour force participation dropped at the age when women typically married and/or had children (see Figure 3.5). However, during the past decade labour force participation among women has increased substantially and the shape of the curve increasingly resembles that of men, albeit still at a lower level. 15 This effect is often explained by the higher labour force participation of women in the former East Germany. Although different attitudes and institutional settings in regard to female employment in the two parts of Germany still persist (Büchel and Spieß 2002), the gap between female labour force participation in east and west has narrowed substantially. Whereas the difference between the female labour force participation rates in eastern and western Germany amounted to almost 19 percentage points in 1991, the difference declined to about 9 percentage points in 2001 (Figure 3.6). The traditional family required the woman in her role as wife and mother to support the male breadwinner. Yet, the increasing female labour force participation rate in western Germany and the persistence of the high female labour force participation rate in the east indicates a changed female self-conception. The employment ratio of all mothers in western Germany increased from 39.7 per cent in 1972 to 51.5 per cent


37

100 90 80

Percentage

70 1971 1981 1989 1991 2001 2001 Male

60 50 40 30 20 10 0 15–19 20–24 25–29 30–34 35–44 45–54 55–64 Age group

Figure 3.5:

Female labour force participation rates by age: 1971–2001

Note: Starting 1991, unified Germany. Source: OECD (2003a).

80

Percentage

75 70 65 60 55 50 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Year West

East

Figure 3.6: Female labour force participation rates in East and West Germany*: 1991–2001 Note: *As a percentage of residential population, age: 15–65. Source: IAB (2003: p. 143); data from the Microzensus of the Statistisches Bundesamt.

38


in 1991, and to 60.8 per cent in 2000. The employment ratio of mothers with children below the age of three increased substantially, from 37.3 per cent in 1991 to 47.7 per cent in 2000 (BMFSFJ 2003, p. 245, own calculations; Büchel and Spieß 2002, p. 76). 16 The increase in female labour force participation is often correlated with demographic changes. Women increasingly prefer to participate in the labour market and do so, it is believed, at the expense of the birth rate. Since the number of childcare facilities is insufficient, 17 women are said to be having fewer children or abstaining from having children altogether, due to the double burden of child rearing and paid employment (Esping-Andersen 2002b, pp. 63–6). Other factors which contribute to the substantial demographic changes we are witnessing include shifting attitudes towards children and family (Huinink 1995) and social policy arrangements which make having children for the purpose of old-age security unnecessary (Sinn 2002). Increased life expectancy on the one hand and the decreasing number of children per woman on the other will lead to a decline in the population as well as to a continuous ageing of society. • An average of 2.1 births per woman would be necessary to maintain the current population in Germany. However, the number of births per woman has declined, dropping from 2.37 in 1960 to 1.38 in 2000 (BMFSFJ 2003, p. 71). • In addition to the birth rate, immigration is a significant factor in determining the population number. Yet even with continued immigration, the population of Germany is predicted to decline from 82 million (1999) to between 65 million and 72 million by the year 2050 (BMFSFJ 2003, p. 95; Birg 2003). • The current ratio of persons aged 20 to 64 to persons 65 and older is 100:25. By 2050 this ratio is expected to be between 100:52 and 100:56 (BMFSFJ 2003, p. 97). To summarise: average economic growth has declined and become more erratic in the past three decades. Full employment – conceptualised as a prerequisite for the viability of the German welfare state – has been the exception rather than the rule since World War II; it has not been achieved since 1973. Moreover, unemployment has reached unprecedented levels. The reach of the standard employment relationship – central to the design of the wage-centred social policy architecture – is on the decline and atypical employment relationships are increasing. The role of married women is changing in significant ways; to some extent


39

we are witnessing the end of the strong male breadwinner model, whereby the role of married women was limited to that of wife and mother. Increasingly, women are no longer withdrawing permanently from the labour market after giving birth. Finally, demographic developments are leading to a population decline, as well as to the further ageing of society.

4 The Changing Normative and Institutional Design of Social Policy

History does not always favour established ideas and concepts of society. Only a few years after Germany had completed its social policy architecture, its foundation was challenged by the ‘adverse’ socioeconomic developments which we outlined in Chapter 3. Eventually, Germany began a process of social policy restructuring which precipitated a fundamental change of its social policy model and led to a dual transformation. The two policy streams which characterise this transformation are a gradual withdrawal from the once-dominant principle of guaranteeing the former living standard of the male breadwinner and an increased support for families through the introduction of new policies and expansion of existing social policy arrangements beyond the welfare–work nexus. In this chapter we will first analyse the quantitative dimension of welfare state change, that is, the development of social spending and financing. Second, we will use a qualitative perspective to scrutinise the old-age and unemployment insurance schemes and family policy. These are the sectors which feature prominently in the construction of the wage earner-centred social policy model of the post-World War II era and which have undergone the most radical changes over the past three decades. Our thesis of the dual transformation of the German welfare state is based on a close examination of these three sectors. This does not mean that we will exclude all other social policy sectors from our analysis. We will include these, especially the social assistance programme, in so far as they are interrelated with changes in the old-age and unemployment insurance schemes or family policy. 40

The Changing Design of Social Policy

4.1

41

A quantitative perspective

A first step in measuring policy output is to analyse budgetary expenditures: ‘Money is not all there is to policy, but there is precious little policy without it’ (Klingemann et al. 1994, p. 41). Taking a Keynesian welfare state perspective, we will first analyse the overall (federal) government expenditures and then scrutinise the development of the social policy expenditures as officially defined. The following analysis is divided into three periods: (1) 1975–1989; (2) 1990–1992; and (3) 1993–2003. The 1975–1989 period was characterised by the political desire to consolidate public spending and reduce the budget deficit. This was in reaction to a sharp increase in public expenditure in the mid-1970s and again in the early 1980s – an increase caused primarily by the two oil crises and two very brief phases of anti-cyclical spending. The Social-Liberal coalition government had, at times, continued to use an expansionary approach towards public spending as a measure to reduce unemployment,1 but when the Christian-Liberal government came to power in 1982, the reduction of government expenditures advanced as the guiding principle of public policy (Schmid and Wiebe 1999). Total government expenditure was reduced from 49.8 per cent of gross domestic product (GDP) in 1982 to 45.3 per cent of GDP in 1989 (Homeyer 1998, p. 347). By 1989 the various consolidation measures, coupled with the advantageous economic climate of the late 1980s, had led to a reduction of the annual federal budget deficit to 0.9 per cent of GDP (Hinrichs 2002a, p. 24).2 The overall state budget, which takes into account the expenditures of the Länder (states), counties and municipalities, as well as the social insurance schemes, even produced a small surplus (Sturm 1998, p. 187). By contrast, the period directly following unification in 1990 was characterised by a massive increase in public spending and a widening budget deficit, due to the immediate financial needs of German unification (Zohlnhöfer 2003). The annual federal budget deficit jumped from 19.2 billion German marks in 1989 to 46.7 billion in 1990 and continued to rise to 52 billion in 1991 (Hinrichs 2002b, p. 26). Beyme (1994, p. 265) has characterised this period as ‘unification Keynesianism against political will’, meaning that although the government was ideologically opposed to using this instrument, it was ‘forced’ to do so in order to respond to the massive increase in unemployment and the perceived need to prevent chaos in the territory of the former East Germany.3 Beginning in 1993, the federal government once again tried to implement a strategy of budget consolidation by reducing its intervention. Initially, however, this policy was not very successful, due to the immense needs

42


triggered by German unification. In 1995 and 1996 the annual public deficit was above 3 per cent of GDP. Public debt rose from 43.5 per cent of GDP in 1990 to 60.9 per cent in 1998 (Hinrichs 2002b, p. 25). Hence, in a very strict sense, Germany failed to meet the debt criterion for the European Monetary Union (EMU). Contrary to the assumptions very often associated with social-democratic governments, the newly-elected RedGreen coalition government continued to pursue the strategy of consolidating public expenditures when it came to power in 1998.4 In 2001 federal government spending was 11.8 per cent of GDP, the lowest level in the past 40 years. The success of this policy, combined with additional revenue from the auction of telecommunication licences, reduced the federal budget deficit from 1.5 per cent of GDP in 1998 to 1.1 per cent in 2001 (Hinrichs 2002a, pp. 23–4). The rise of the overall state budget deficit – as defined and used by the European Union (EU) for the determination of compliance with the deficit criterion of the Stability Pact – to 2.8 per cent of GDP in 2001 can therefore not be attributed to an increase in federal spending. The increase was largely the result of reduced government revenues due to the effects of the 2000 tax reform and sluggish economic growth. Furthermore, the federal government renewed its commitment to the EU to reduce the budget deficit. However, a comprehensive strategy of deficit reduction by all territorial entities is essential if Germany is to comply with this commitment (SVR 2001, pp. 118 ff.; Deutsche Bundesbank 2002a, pp. 50–63). In 2002 rising transfers from the federal government to the pension system, the Federal Employment Service, and to the so-called ‘new states’ (neue Bundesländer) caused the biggest increases in federal budget outlays (SVR 2002, pp. 215–17). These increases were triggered more or less automatically – due to existing statutory regulations – by the economic slump and by sharply rising unemployment. According to the definition used by the EU to determine the state deficit, the federal government’s deficit rose from 1.4 per cent of GDP in 2001 to an estimated 1.8 per cent in 2002. Therefore, the federal government was directly responsible for a 0.4 percentage point increase in the overall state deficit, which rose from 2.8 per cent of GDP in 2001 to an estimated 3.7 per cent in 2002 (SVR 2002, p. 208). 5 Our analysis of the quantitative data demonstrates that, by and large, the federal government has pursued a strategy of fiscal conservatism, and has not systematically used public spending programmes to increase domestic demand in an effort to reduce the massive unemployment. Two exceptions, however, stand out: the sporadic and short-lived Keynesian interventions by the Social-Liberal coalition government in


43

the mid-1970s and early 1980s and the massive increases in spending by the Christian-Liberal coalition during the immediate unification process. In the second step of our analysis, we will now examine social policy expenditure in a more narrow sense. Since Germany has a highly complex public financing structure through its federal system as well as through the existence of para-fiscal institutions such as the social insurance funds, we will take a closer look at the ‘social budget’. 6 By analysing the social budget from 1975 on, we can clearly identify major reductions in spending levels prior to unification (see Figure 4.1), although considering the social trends during this period, we might have expected the opposite development.7 This trend can therefore be characterised as retrenchment. Furthermore, the development of social security contributions shows a considerable stabilisation in the latter half of the 1980s (Figure 4.2). The unification process reversed the prior trends in spending and in the level of social security contributions, leading to massive increases. This development was not, however, a result of programmatic social policy expansions. Rather, it was a consequence of transferring the West German social policy design to the territory of the former East Germany – a ‘necessary’ measure based on the notion of justice in a unified

33

Percentage of GDP

32

31

30

29

28

27 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 Year

Figure 4.1:

Social spending as a percentage of GDP: 1975–2001

Notes: Starting 1991, data for unified Germany; data for 1999 and 2000 preliminary; 2001 projections. Source: BMGS (2003a: Table 7.2).

44


22

Percentage

20

18

16

14

12 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Year

Figure 4.2: Employers’ contributions to social insurance schemes as a percentage of gross wage: 1975–2003 Notes: Not included are the premiums for the accident insurance. Due to small differences between east and west, the data presented here is based on premiums in the west. Source: BMGS (2003a: Table 7.7).

Germany (Grosser 1998). Consequently, after the extension of the West German welfare state to the east was formally accomplished, Helmut Kohl’s coalition government reverted to a strategy of consolidation by cutting a wide variety of programmes (see below). The cumulative effect of the policy changes enacted after 1982 – according to calculations based on figures from the Ministry of Labour – reduced social spending by almost 3 per cent of GDP by 1997.8 Without these spending reductions, the social insurance contributions would have risen even further, since about 60 per cent of social policy outlays are financed through contributions. 9 In retrospect, we can characterise the 1990s as an exceptional period. In 1996 the rapid increase in social spending stopped, and by 1998 the social insurance contributions began to decline, before moving upwards again with the onset of a new economic slump in the early 2000s (see Figures 4.1 and 4.2). If we examine social spending by region, we by and large witness continuity in the west and a gradual, but persistent increase in the east, following a decline between 1992 and 1994. Social spending in the east reached almost 50 per cent of GDP in 2001 (see Figure 4.3).


45

60

Percentage of GDP

55 50 45 40 35 30 25 20 1991

1993

1995

1997

1999

2001

Year West Figure 4.3:

East

Social spending in east and west as a percentage of GDP: 1991–2001

Note: Data for 1999 and 2000 preliminary; 2001 projections. Source: BMAS (2002b: Table I-1).

The high level of social spending in the east is financed through continuously rising transfers from the west. These financial subsidies are channelled to the east largely through transfers from the ‘western’ unemployment and old-age insurance funds. From 1991 to 1997 these transfers totalled more than 100 billion euros (Tegtmeier 1997, Appendix 3). In 2001 alone about 25.8 billion euros were transferred within the unemployment and old-age insurance schemes (BMAS 2002b, Table III; Table III, 112; Table III, 16). It is projected that by 2010 a total of about 160 billion euros will have been transferred within the old-age insurance system since 1996. Without these transfers the pension system in the west would have accrued an annual surplus of more than 10 billion euros, which would have added to the previous surplus of about 20 billion euros in 1989. Consequently, looking at western Germany alone, contributions to the retirement system could have been reduced in the early 1990s, without any increases until 2015 (Czada 1998). Hence, dependent employees largely shouldered the adjustment costs associated with the process of unification in the realms of old-age insurance and labour market policies. Civil servants and self-employed workers are exempted from paying social insurance contributions. In 1999 the Red-Green coalition government introduced an ecological tax in order to reduce the sharply increased social insurance contributions.

46


Between 1999 and 2003 revenue from the ecological tax was estimated to total 57 billion euros and was earmarked by statute for the old-age insurance fund. Without the revenues from the ecological tax, the employers’ contributions to the old-age insurance fund would have been 0.75 percentage points higher in 2002 (Truger 2001; BMF 2002, p. 10). Furthermore, the federal subsidies to the old-age insurance fund were substantially increased, with a moderating effect on the level of contributions. Yet, some observers argue that the social insurance contribution rates could be further reduced without cuts in the benefits – that is, if the state were prepared to finance fully those benefits and services of the social insurance schemes which are not based on the philosophy of social insurance, but rather on general social policy considerations. According to Schmähl (2002a), the federal government contributed only 7.3 billion German marks to the expenditures of the Federal Employment Service in 1999. Yet, the expenditures triggered by provisions based on general social policy considerations within the responsibilities of the service, such as public employment measures, training and placement, amounted to 44.5 billion German marks. If such services and benefits had not been financed through the social insurance schemes, the contribution rates for employers could have been reduced by four percentage points. If we disaggregate the spending data along functions for the years 1995 to 2001, we can detect a small increase in spending for the category ‘old age’ – as we would expect, based on the ageing of society – more or less continuous spending for the category ‘health’, and a decline in expenditures for employment, despite continued mass unemployment. Spending for the category ‘marriage and family’ increased by 0.8 percentage points of GDP – contrary to expectations built on demographic developments (see Figure 4.4). Figures from the Bundesbank show that spending for families between 1992 and 1999 even increased by an annual average of 4 per cent, reaching 150 billion euros in 1999, or 7.6 per cent of GDP (Deutsche Bundesbank 2002b, pp. 21–2). Based on the quantitative data we have presented here, it is evident that the Red-Green government did not follow a path of expansionary policies. Moreover, it consolidated public finances and gradually reduced social insurance contributions, while at the same time continuing to offer greater financing for programmes to support families. Yet, despite efforts to consolidate expenditures, the federal budget and the social insurance funds – especially the sickness insurance funds and the pension funds – came under severe financial pressure during the fourth year of the Red-Green coalition government. This once again made further cutbacks and/or an increase in social insurance contributions a short-term


47

14

Percentage of GDP

12 10 8 6 4 2 0 1995

1997

1999

2001

Year Old age

Health

Marriage and family

Employment

Figure 4.4: Expenditures for selected social policies by function as a percentage of GDP: 1995–2001 Note: Data for 1999 and 2000 preliminary; 2001 projections. Source: BMAS (2002b: Table I-3).

‘necessity.’ Without continued reform and/or a speedy economic recovery, social insurance contributions are likely to rise and will perhaps even surpass the level reached in the late 1990s, during the tenure of the Christian-Liberal coalition government (Nullmeier 2003). Controlling for the effects of unification, we can argue that overall we have witnessed a process of consolidation for the period under consideration. Contrary to this overall process, expenditures for family policies were expanded. Although the quantitative data indicates a change in the composition of social policy expenditures, it cannot fully and accurately reflect the effects of social policy legislation. The data can only reflect those policy changes which have been implemented, but not those which have been legislated and are designed to be phased-in over longer time periods.

4.2

A qualitative perspective10

Historically, the social benefits and services of the German welfare state were almost exclusively based on the wage earner-centred approach for male workers, while married women were to provide unpaid social services. Using the results of our analysis of the quantitative data as our

48


starting point, we will show in the following qualitative analysis that, in addition to increasing the spending for families, the overall social policy design underwent a dual transformation. Overall, social policy in Germany is withdrawing from guaranteeing that the achieved living standard of (male) workers will be maintained through wage earnercentred social insurance schemes. At the same time, existing family policies are being expanded and new family-oriented social policies are being introduced. Traditionally, the social policy design entitled family members to certain benefits and services. But in general, these constituted derived benefits based on the employment contract of the (male) worker. They can therefore be characterised as indirect wage earner-centred benefits. Family-oriented benefits differ from the previous arrangements because they are explicitly not wage earner-centred, but rather based solely on the existence of children or the provision of familial services (Bleses and Seeleib-Kaiser 1999). Ending the public guarantee of the achieved living standard The old-age and unemployment insurance schemes are the two social insurance systems which in the past most fully incorporated the principles of wage earner-centred social policy – namely, contribution financing, actuarial equity, and the guarantee that the achieved living standard would be maintained. These principles constituted the core pillars with regard to securing the material existence of the wage labourer through social policy.11 We will now show how fundamental changes, tending towards an increased means-testing and marketisation, have occurred in these programmes, leading to the gradual withdrawal from the public guarantee of maintaining the worker’s achieved living standard and to an increase in family-oriented benefits. We will first focus on the unemployment insurance scheme and then analyse the changes in the old-age insurance programme. Unemployment insurance In Chapter 2 we demonstrated that the wage earner-centred unemployment insurance scheme was based on the core principles of securing the worker’s achieved living standard through a relatively high replacement rate, guided by actuarial equity, and the preservation of the occupational status in the case of unemployment. Active labour market policy was largely designed as a supply-side instrument to improve the skills of unemployed workers and of those who risked becoming unemployed. The changes legislated during the past decades have, to some extent, reinforced the strength of the work–welfare nexus, leading to an increased


49

(re)commodification of workers (Neyer and Seeleib-Kaiser 1995). This has occurred through a (partially implicit) shift towards the means-testing of benefits and a shift away from preserving the occupational status of unemployed workers. The unemployment programme traditionally differentiated between an unemployment insurance benefit, fully based on the social insurance principle, and an unemployment assistance benefit, based on a mixture of means-testing and social insurance principles. But the unemployment assistance benefit did not play an important role in securing against the risk of unemployment. In the past, the main aim of active labour market policy was to prevent unemployment and substandard employment relationships. However, since 1975, active labour market policy has largely followed a pro-cyclical path, and since the late 1990s, policy has primarily focused on reintegrating unemployed workers as quickly as possible back into the labour market. Policies of the Social-Liberal coalition government (1975–1982).12 Initially, the Social-Liberal coalition government reacted to the economic crisis and the abrupt increase in unemployment – from 1.2 per cent in 1973 to 4.7 per cent in 1975 (see Chapter 3) – by pursuing an anti-cyclical policy approach, in other words, by advancing public investments and increasing active labour market measures, primarily public employment programmes. Between 1975 and 1977 these measures created a total of about 190,000 jobs (Frerich and Frey 1996, p. 171). The number of workers participating in public employment programmes alone jumped from 3000 in 1974 to 51,000 in 1978 (Lampert 1989, p. 181). Furthermore, the expenditures of the Federal Employment Service rose quickly in 1975 as a result of various benefit expansions legislated in 1974, maximising its function as an automatic stabiliser of the economy. Included among the benefit expansions of 1974 were the introduction of the ‘insolvency benefit’ for workers, 13 the automatic adjustment of unemployment insurance and assistance benefits, and the increase of the short-time work benefit 14 to 68 per cent of lost earnings and a period of two years. Shortly afterwards the federal government increased the income replacement ratio of the unemployment insurance benefit to 68 per cent of the net wage and the replacement ratio of the retraining allowance for unemployed workers from 81.25 per cent to 90 per cent of the net wage, in order to give the unemployed an incentive to upgrade their skills (Seeleib-Kaiser 1996, p. 152). By the end of 1975 the federal government began to change course and legislated the first cuts in social programmes (Structural Budget Law of 1976). This approach also dominated the development of labour market policies. 15 The rapid increase in unemployment coupled with

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the contribution-based financing structure of the unemployment insurance scheme led to a rapidly increasing deficit in the Federal Employment Service’s budget. This development made it apparent that the Federal Employment Service could not fulfil its core functions of granting insurance benefits and stopping unemployment and underemployment in times of economic crisis by using its ‘own’ revenues.16 In times of economic crisis, as the revenues from social insurance contributions usually decline and the expenditures for benefits and services increase, the Federal Employment Service is dependent on subsidies from the federal government, which are financed by general taxation. In 1975 the federal subsidy amounted to eight billion German marks (Webber 1982, p. 263). One of the Social-Liberal government’s first cost-containment measures was to reduce the income replacement ratio of the retraining allowance to 80 per cent for those workers in retraining measures that the Federal Employment Service defined as ‘necessary’ and to 58 per cent for those retraining measures defined as ‘appropriate’. This course of action led to a reduction in the number of participants by 50 per cent between 1975 and 1977, since the benefits paid to those participating in ‘appropriate’ measures were now lower than the replacement ratio of the regular unemployment insurance benefit. The government had turned an incentive into a disincentive. At the end of the 1970s, in response to falling unemployment, the federal government once again liberalised the eligibility criteria for retraining measures. But as unemployment increased sharply at the beginning of the 1980s, 17 the government immediately implemented cuts by, for example, turning the retraining allowance for those workers participating in ‘appropriate’ measures into a loan and reducing the replacement ratio for those participating in ‘necessary’ measures to 75 per cent of the net wage.18 In 1979 the subsidy paid to sponsored employees of organisations participating in the public employment programmes was standardised at 80 per cent of the respective collective bargaining wage. Prior to this move, the subsidy cap had been set at 100 per cent of the wage.19 Two further important restrictions regarding public employment programme measures came into effect with the Labour Promotion Consolidation Law of 1982. Firstly, public employers could now function as participating organisations in the public employment programmes only in exceptional cases. Secondly, only unemployed workers entitled to unemployment insurance or assistance benefits were eligible for placement in public employment programmes. As a consequence of these measures the number of participants in public employment programmes dropped to about 29,000 in 1982 (BMGS 2003a, Table 8.14A), while at the same time the


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unemployment rate was rising. Hence, we can argue that these measures had a pro-cyclical effect. The Social-Liberal coalition government refrained from explicitly reducing the replacement ratio of the unemployment insurance and the assistance benefits. However, in 1982 the coalition changed the calculation formula for determining the reference wage for these benefits, namely, by eliminating overtime pay and special bonuses20 from the calculation, despite the fact that social insurance contributions were levied on these payments. This measure led to a significant decline in the average unemployment insurance and assistance benefit. In real terms, the expenditures per unemployed individual receiving the unemployment insurance benefit declined by about 16 per cent, that is, from 1940 German marks (992 euros) in 1982 to 1629 German marks (880 euros) in 1983. The average unemployment assistance benefit fell by about 17.5 per cent, from 1722 German marks (833 euros) to 1419 German marks (726 euros) (Seeleib-Kaiser 2001, p. 135).21 Furthermore, the government extended the minimum contribution period for qualification for unemployment insurance benefits from six months to 12 months (Clasen 1994, p. 156). Finally, the SocialLiberal government expanded the periods for which the administrators of the Federal Employment Service could decline to pay unemployment compensation in cases of uncooperative behaviour on the part of the unemployed from four weeks to eight weeks.22 Despite these measures to curtail the outlays for labour market policies, the rising costs of increased unemployment, coupled with the unwillingness of the federal government to adequately increase its subsidy to the Employment Service, made it necessary to raise the unemployment insurance contribution rate from 2 per cent in 1975 to 4 per cent in 1982. 23 To summarise: the labour market policy of the Social-Liberal coalition government from 1975 on was driven by the aim of controlling costs, leading to the first cuts in benefit entitlements and to a largely pro-cyclical active labour market policy, which meant cutting measures as unemployment rose and expanding measures as the economy recovered. Policies of the Christian-Liberal coalition government (1982–1998).24 The Labour Promotion Consolidation Law of 1982, which was passed about six months before the new Christian-Liberal coalition took power, paved the way for the policies of the years to come, resulting in a path of further reductions and cutbacks. These cuts were at that time primarily focused on the unemployment compensation payments, not on active labour market policies. In light of the socio-economic situation reflecting the ‘particularities’ of the labour market in the former East Germany after

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1989, we will first discuss the policy developments up to German unification, and we will then analyse the policies pursued afterwards. 1982–1990. Shortly after taking power, the new Christian-Liberal coalition government initiated a ‘Qualification Offensive’, which led to an increase in the annual number of participants in retraining and further training measures from about 300,000 in 1982 to 565,611 in 1988. Other active labour market policy measures and programmes were also expanded – the number of disadvantaged unemployed who were supported through special measures rose from 440,000 to 696,163, and the number of those participating in public employment programmes rose from 86,000 to 114,888 during the same period. Between 1982 and 1988 the annual number of participants in active labour market policies rose from 545,529 to almost 1.4 million. If we choose the year 1980 as a reference point for our comparison, the difference between the annual number of participants in active labour market policies under the Social-Liberal coalition government and the Christian-Liberal government would be smaller. But, contrary to the stop-and-go approach pursued by the previous government, the Christian-Liberal coalition government continuously expanded the measures of active labour market policy until 1987 (Frerich and Frey 1996, p. 177). 25 In contrast to this moderate expansionary policy approach regarding active labour market policy measures, the benefit levels of the unemployment compensation and the subsidies for those participating in measures of active labour market policy were both reduced (Seeleib-Kaiser 1996, p. 152): • In 1983 the government reduced the unemployment insurance and unemployment assistance benefit as well as the retraining allowance by applying new measures to the calculation of the reference wage. • In 1984 the retraining allowance for workers participating in ‘necessary’ measures was reduced from 75 per cent to 70 per cent (for those without children from 68 per cent to 63 per cent). The entitlement to the retraining loan was abolished for those unemployed workers participating in ‘appropriate’ measures.26 • Also in 1984, the replacement ratio for the unemployment insurance benefit, the short-time work benefit, and the bad weather benefit (largely for construction workers during the winter months) was reduced from 68 per cent to 63 per cent for workers without children. The replacement ratio for unemployed workers without children receiving the unemployment assistance benefit was cut from 58 per cent to 56 per cent.


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Furthermore, starting in 1983 the length of time a worker was allowed to claim unemployment insurance benefit was made more strongly conditional on the previous duration of employment. Whereas previously a worker needed to have worked for two months in order to receive one month of benefits, now the worker needed to have worked for three months to be entitled to draw one month’s benefit. Thus, the maximum duration of unemployment insurance benefit receipt of 12 months was granted only to those with a prior contribution record of 36 months instead of the previously required 24 months (Clasen 1994, p. 160).27 In order to increase the pressure on the unemployed to accept suitable job offers, the period of time administrators were allowed to refuse to grant benefits was extended from eight weeks to 12 weeks. The unemployment insurance contribution rate varied over the years between 4 per cent and 4.6 per cent. In the mid-1980s, despite the high unemployment rate, the Federal Employment Service’s budget at times generated surpluses (Lampert 1989, p. 178), due to the cost-saving effects of the retrenchment measures enacted in the area of passive labour market policy. Although the changes had ‘positive’ effects from a budgetary perspective, the changes negatively affected the income position of the unemployed. Starting during the tenure of the Social-Liberal coalition government in the late 1970s, and accelerating in the 1980s, many unemployed workers lost their entitlement28 to unemployment insurance benefit payments and increasingly had to rely on the means-tested unemployment assistance or social assistance. Between 1975 and 1985 the ratio of unemployed workers receiving unemployment insurance benefits dropped by almost 30 percentage points, whereas the ratio of those receiving unemployment assistance payments increased by about 16 percentage points (see Figure 4.5). The ratio of those unemployed receiving no unemployment benefits, and who concomitantly had to depend largely on social assistance payments or income from relatives, rose from 23.9 per cent in 1975 to 36.9 per cent in 1985 (Seeleib-Kaiser 1996, p. 156). This change in the structure of the unemployment benefit receipt precipitated a massive increase in the number of people claiming social assistance, from 851,000 in 1980 to 1.8 million in 1990 (West Germany) (Statistisches Bundesamt 1999, p. 33).29 Whereas in 1980 some 9.8 per cent of all individuals drawing social assistance did so because they were unemployed, by 1989 this percentage had risen to 32.6 per cent (Seeleib-Kaiser 1996, p. 148). Since the cities and counties finance social assistance, the shift within the benefit receipt structure led to an increase in the financial burden for these territorial entities. As a cost-saving measure, cities and counties began to develop and expand their own

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70 60

Percentage

50 40 30 20 10 0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 Year Percentage with unemployment insurance Percentage with unemployment assistance Figure 4.5: Percentages of registered unemployed receiving unemployment insurance and unemployment assistance benefits: 1975–2002 Notes: Own calculations based on annual averages; starting 1991, unified Germany. Source: BMGS (2003a: Tables 2.10 and 8.14).

local employment and workfare programmes. Officially, these territorial entities claimed that it was their aim to permanently reintegrate the social assistance recipients into the labour market, but many of the recipients ended up receiving unemployment compensation benefits again after the workfare measure had expired. This was due to the fact that, depending on the specific design of the local workfare programmes, many participants were employed on a time-limited basis in jobs covered by the statutory unemployment insurance scheme (Hoppensack and Wenzel 1985). 30 During the 1980s and 1990s the federal government enacted a number of social assistance reforms designed to curb the financial burden of cities and counties. These reforms included measures strengthening work requirements within the social assistance programme, emphasising the income differential between social assistance payments and the wages received by workers in the lowest brackets of collective bargaining agreements, and capping benefit increases ( Jaedicke et al. 1991, pp. 58 ff.; Wenzel 1996). Capping social assistance benefit increases led to a relative decline in the


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income position of social assistance recipients compared to other groups in society (Hochmuth et al. 1997, p. 196).31 For some time, older unemployed workers were excluded from this process towards increased recommodification. Moreover, the government even increased their decommodification potential. From 1985 to 1987 the conservative government legislated various incremental measures extending the receipt of unemployment insurance benefits for older workers. After 1987 unemployed workers aged 42 and 43 were entitled to receive unemployment insurance benefits for a maximum 18 months, workers between 44 and 48 for a maximum of 22 months, workers between 49 and 53 for 26 months, and workers older than 54 for 32 months (Frerich and Frey 1996, p. 180). In addition, the government enacted the Early Retirement Law of 1984. Under this law employers could receive a subsidy from the Federal Employment Service if they paid their laid-off employees aged 58 and older an early retirement benefit of 65 per cent of their former gross wage until they reached the regular statutory retirement age (63 or 65 years). Another prerequisite for receiving the subsidy was that the employers hire a formerly unemployed worker or create an apprenticeship position. The government subsidy amounted to 35 per cent of the early retirement benefit. In 1989 this law was replaced by the Old Age Part-Time Law, which stipulated that if a worker aged 58 or older took on a part-time position within the company and the company then hired an unemployed worker, it could receive a subsidy. The amount of the subsidy was equivalent to 20 per cent of the part-time wage and was supposed to be used to boost the part-time wage, as well as for additional social insurance contributions, compensating the loss of income of the older worker (Frerich and Frey 1996, pp. 187–9).32 Despite these favourable conditions, many employers opted for the less costly strategy of dismissing older workers. Due to the fact that the maximum duration of unemployment receipt was extended and a worker aged 58 or older was not required to actively search for a new job, companies could dismiss these workers largely without conflict. Companies offered generous redundancy payments to these former employees, often with the consent of the work councils. Together with unemployment insurance benefits, the redundancy payments added up to the worker’s previous net income. At the age of 60 these unemployed workers could receive a regular old-age insurance benefit (Gatter and Hartmann 1995). Hence, employers combined the already previously available options within the institutional arrangements of the unemployment and old-age insurance schemes to externalise their personnel adjustment costs. Between 1975 and 1990, for example, the steel industry reduced

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its workforce by about 48 per cent. Two-thirds of these reductions were achieved by using various early retirement schemes (Rosenow and Naschold 1994, p. 170). To summarise: the possibilities for young and prime-aged workers to receive a social income outside the labour market were curtailed by the various legislated changes within the unemployment insurance and assistance schemes. Unemployed workers were increasingly forced back into the labour market in order to secure their livelihood. Hence, we can speak of a process of recommodification for young and prime-aged workers (Neyer and Seeleib-Kaiser 1995). This process was more moderate for unemployed workers with children, since the conservative government did not cut their benefits by as much, thereby reintroducing a special family-oriented replacement ratio. In regard to older workers, the conservative government substantially extended the maximum period for claiming benefits. This made it easier for companies to externalise their personnel adjustment costs and led to an overall reduction in the labour supply. Finally, although the Christian-Liberal coalition government increased the number of participants in active labour market measures, the overall expenditures for these measures did not increase substantially, since the subsidies and benefits paid out in these programmes were reduced. 1991–1998. The decline of unemployment in the late 1980s – a trend which accelerated with the beginning of the unification boom33 in the early 1990s – once again briefly filled the coffers of the social insurance funds. This money was desperately needed in the coming years to finance the transfer of West German social policy arrangements to the ‘new states’. It was anticipated that the initial labour market adjustment problems, resulting from the transformation of a state-run socialist economy to a market economy,34 would be ‘solved’ through time-limited financial transfers from the west. However, it soon became obvious that the labour market problems in the former East Germany were going to persist in the medium or even long term. The onset of the economic downturn in 1993 and the following unstable economic development, which generated an unprecedented level of unemployment, increased the financial stress of the unemployment insurance system. In 1991 the contribution rate to the unemployment insurance fund was increased from 4.3 per cent to 6.8 per cent of gross wages. This move was intended to offset – at least partially – the tremendous financial needs of the labour market policy in the ‘new states’. In 1992 the contribution rate dropped slightly, but since 1993 it has stayed constant at 6.5 per cent.


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Despite the increased contribution rate, the revenues in the east were insufficient to finance the labour market policy measures. Between 1991 and 1993 this generated a deficit of approximately 93 billion German marks. About two-thirds of the deficit was financed by transfers from contributions of workers in the west and only one-third was covered by federal subsidies out of general revenues. In 1994 and 1995 the deficit in the the east amounted to 57 billion German marks, of which about 70 per cent was covered by transfers from the contributions of workers in the west (Heinelt and Weck 1998, p. 42). Without substantial cutbacks or an increase in the federal subsidy – financed out of general revenues – it was unlikely that the unemployment insurance contribution rates would be significantly reduced. For a period of time labour market policy in eastern Germany differed from the approaches pursued in the west. On the one hand, measures in the east were implemented at a level unprecedented in the west. On the other hand, innovative instruments were being developed, which were later integrated into the overall labour market policy arsenal. Shortly after unification, training measures were employed in the east at a level twice as high as in western Germany. The total number of new entrants to the training measures jumped from 574,000 in 1990 to almost 1.5 million in 1991. In 1992 the number of new entrants to these training measures stayed almost constant, but in 1993 the number dropped to 642,000, despite continuously high unemployment. Similarly, the number of jobs in public employment programmes rose sharply – from 83,000 in 1990 to 266,000 in 1991, and to 466,000 in 1992, before declining again to 321,000 in 1993 (see Figure 4.6). Between 1990 and 1993 the annual expenditures for active labour market measures skyrocketed from 18 billion German marks to more than 64 billion German marks. Afterwards, expenditures more or less continuously declined again, down to 37 billion German marks in 1997 (BMGS 2003a, Table 8.14A), before being increased briefly by the Kohl government in 1998, an election year. In 1993 a qualitatively new instrument of active labour market policy was introduced in the east, before being made available in all of Germany starting in 1995. The basic idea behind this new instrument was to promote work instead of compensating unemployment. Accordingly, the Federal Employment Service provided subsidies for jobs in sectors instrumental in improving the environment, social services and juvenile social work initiatives, as well as sports and culture. The subsidies were set at the level of average unemployment insurance or assistance payments, including social insurance contributions. 35 Unlike jobs in the regular

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Participants in 1000s

1400 1200 1000 800 600 400 200 0 1991

1993

1995

1997 Year

Training and re-training

1999

2001

Public employment

Figure 4.6: Participants in measures of ALMP (training and re-training, public employment programmes): 1991–2002 Source: BMGS (2003a: Table 8.14A).

public employment programmes, these jobs were subsidised for 36 months instead of 12 months. If the organisation participating in the programme eventually offered a permanent contract to the employee, the subsidy could even be paid for four full years (Weiland 1994, p. 7). In addition to these active labour market policy measures aimed at creating jobs, the short-time work benefit was widely used in the east as a transitional measure during the immediate unification process.36 In 1990 and 1991 the short-time work benefit was granted to workers in the ‘new states’ even though it was clear that many of the companies would not survive the transition period and that the workers had completely stopped working. The number of workers receiving the short-time work benefit jumped from 758,000 to approximately 1.6 million, before dropping again to 180,000 in 1993 (Heinelt and Weck 1998, pp. 74 ff.). In addition to the active measures we have already discussed, workers from the former East Germany aged 55 years and older were paid a special early retirement benefit so that the labour supply might be reduced (see below). According to a range of estimates, the proportion of workers participating in these various active labour market policy measures during the early 1990s reached 15 to 23 per cent of the labour market potential in eastern Germany (Schmidt 1994, p. 19). As we can see from Figure 4.6, the number of participants in measures of active labour market policy abruptly declined in 1993, and never again reached the levels of the immediate unification period, despite


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the fact that unemployment continued to increase substantially in the east until 1997. In addition to reducing the number of participants in these measures, the government passed legislation making participation in these programmes more restrictive and selective. Furthermore, the wage levels in public employment programmes were reduced to 80 per cent of the amount paid in comparable non-subsidised jobs (Bieback 1997, p. 20). Finally, the training allowance was reduced to the level of the respective unemployment compensation payments, and eventually, in 1994, was even transformed from an entitlement into a discretionary benefit (Seeleib-Kaiser 1996, pp. 152–9). The cuts in labour market policy were not limited to active measures. In 1994 the replacement ratio for the unemployment insurance benefit was reduced from 68 per cent to 67 per cent for workers with children and from 63 per cent to 60 per cent for those without children.37 The replacement ratio for the unemployment assistance benefit was reduced from 58 per cent to 57 per cent for beneficiaries with children and from 56 per cent to 53 per cent for those without children. In addition to these changes, the eligibility criteria for unemployment assistance were further restricted. The Christian-Liberal coalition government introduced a one-year time limit for drawing ‘ordinary unemployment assistance benefits’. This benefit was available to those unemployed workers who did not meet the necessary minimum contributory periods for entitlement to unemployment insurance benefits. In the past, the receipt of this benefit could, in principle, have lasted indefinitely. Now only those unemployed workers who had exhausted their unemployment insurance benefits could receive unemployment assistance benefits indefinitely. 38 Through the implementation of the Unemployment Assistance Reform Law of 1996, the unemployment assistance benefit was reduced by 3 per cent annually after one year of receipt. Furthermore, workers receiving unemployment assistance could now be ‘forced’ to take up low-wage seasonal jobs such as, for example, harvesting produce. If they did not comply they could be sanctioned by having their benefit refused for a period of time (Heinelt and Weck 1998, p. 50). The Labour Promotion Reform Law of 1997/1998 included further measures to ‘tighten’ the disincentives for unemployed workers to accept job offers outside their occupations, as well as new instruments of active labour market policy. The first part of the law redefined that which constituted a ‘suitable job’. Whereas in the past an unemployed worker could have rejected job offers which were below his or her former occupational status, under the new law any job that paid up to 20 per cent less than the previous job would be deemed suitable within the first

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three months of an unemployment spell. From the fourth to the sixth month, any job offer paying up to 30 per cent less would be considered suitable. From the seventh month of receiving benefit, any job with a net wage equal to the unemployment compensation payment is defined as suitable (Bieback 1997).39 In addition to these changes, the law raised the age at which older workers would be entitled to extended unemployment insurance benefit payments. Instead of being entitled to receive an extended unemployment insurance benefit at the age of 42, workers now had to be at least 45, reaching the limit of 32 months of possible benefit receipt only after turning 58. Furthermore, redundancy payments would now be taken into account when determining unemployment compensation (BMAS 1997, pp. 32–39). 40 This measure aimed to reduce the incentives for companies to externalise substantial parts of their personnel adjustment costs by laying off older workers. The second part of the Labour Promotion Reform Law, which was implemented in 1998, redefined the aim of the original law by shifting the responsibility for achieving employment towards employers and especially towards the workers themselves (Sell 1996, p. 520). According to the new law, public labour market policies had to be implemented in accordance with the employment objectives of the federal government. In contrast to the ‘old’ goals of the Labour Promotion Law, which stated that it was the primary responsibility of the state to prevent and avoid unemployment, the new goal did not state a clear, normative aim. The obligations of workers were to refrain from leaving a job without having secured new employment and, in principle, to accept any suitable job offer.41 Finally, a new clause laid down new ways in which a claimant could lose entitlement if he or she did not cooperate with the Federal Employment Service. If the total duration of the periods of benefit refusal added up to 24 weeks, the recipient would lose the entitlement to unemployment compensation. Prior to this new clause the Federal Employment Service had been required to sanction a claimant twice with the maximum duration of benefit refusal (12 weeks) before he or she would lose the entitlement. Despite all these changes, it would be inaccurate to characterise the Labour Promotion Reform Law as a full-blown retrenchment, since it also encompassed new benefits and an intensification of active labour market measures. The introduction of the ‘part-time unemployment benefit’ was especially important. This benefit was granted to a worker who, having held more than one job,42 loses one of them. The government obviously intended this measure as an incentive for (unemployed) workers to take up two part-time jobs if a full-time job was not available.


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Receiving this part-time benefit was, however, limited to six months. In 1998 the government enacted a measure that made part-time employment in general more attractive. According to this law, a worker who had switched from full-time to part-time employment before becoming unemployed would be entitled to an unemployment compensation payment based on his former full-time income. These measures complemented the previously implemented ‘Part-Time Law for Older Employees of 1996’. The main aim of this new law was to make it more attractive for employers not to dismiss older workers – as many employers had been doing in order to take advantage of the extended duration of unemployment insurance benefit payments – but to continue to employ them on a part-time basis. 43 Furthermore, the Labour Promotion Reform Law also included a provision to pay time-limited subsidies to employers who hired unemployed workers, while at the same time relaxing the stringent dismissal regulations for these workers. Finally, a ‘re-integration contract’ was created, which clearly stated the responsibilities of both the Federal Employment Service and the unemployed worker (cf. Sell 1996; Bieback 1997; Clever 1998). All these measures can be subsumed under the general objective of promoting work instead of compensating unemployment. To summarise: in the immediate unification period, the conservative government massively used the instruments of active labour market policy in order to minimise unemployment. However, this approach was discontinued after about two years. In addition, measures were introduced which were designed to reduce the incentives for early retirement that had initially been expanded in the mid-1980s. With regard to unemployment insurance and unemployment assistance benefits, the policy approach of recommodification was continued and accelerated. This move essentially led to a withdrawal of the public guarantee that the unemployed worker would maintain his achieved living standard. This process was more moderate for unemployed workers with children, since the conservative government did not cut their benefits by as much, thereby recognising that they were in greater ‘need’ of benefits. The Red-Green coalition (1998–2003). The first two years of the Red-Green coalition government were characterised by a beneficial economic situation – the economy grew between 1.8 per cent and 3 per cent. Unemployment fell from 12.3 per cent in 1998 to 10.3 per cent in 2001. Starting in 2001, however, economic growth turned sluggish and did not pick up during the following years. Economists projected an annual

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growth of 0.5 per cent for 2003 and an average unemployment of about 4.5 million (Bach et al. 2003). 44 As with the previous government, these economic peaks and troughs have led the Red-Green coalition to introduce repeated changes in both active and passive labour market policies. As a first step, in 1999 the Red-Green government reinstated some of the provisions which had been abolished by the former conservative coalition. These included – in the realm of active measures – a liberalisation of the eligibility criteria for older workers to receive reintegration allowances. In terms of passive measures, the new government abolished the regulation whereby redundancy payments paid by employers were partly offset through lower unemployment compensation payments (cf. Heinelt 2003). In 2000, following a ruling by the Federal Constitutional Court, a substantial benefit expansion was realised. The Federal Constitutional Court adjudicated a case in which it was claimed that the changed calculation for the reference wage, which had been legislated in 1982 by the Social-Liberal coalition government as a cost-saving measure, was unconstitutional.45 The changed calculation had eliminated overtime and bonus payments as part of the reference wage. The Federal Constitutional Court ruled in favour of the claimant, and bonus payments as well as overtime were once again included in determining the reference wage for the calculation of the unemployment insurance benefit.46 Finally, the Job Activation Law of 2002, a law primarily addressing issues of active labour market policy (see below), included substantial improvements for workers who receive maternity benefit47 or who take the option of parental leave until a child reaches the age of three. These periods of leave are now considered as contributory periods with regard to the unemployment insurance scheme, in the same way as the familial care periods which have been recognised since 1986 in the old-age insurance scheme (see below). It must be stressed that these benefit expansions were very selective and by no means included all the provisions that the Social Democrats and Greens had called for during their time in opposition to the previous government. In fact, the overall policy approach pursued by the RedGreen coalition can by and large be characterised as a continuation of the strategy already pursued by the conservative government, a strategy which is designed to tighten unemployment compensation payments. In 2000 the Red-Green coalition completely abolished the ‘ordinary unemployment assistance benefit’. The receipt of this benefit had already been limited to one year by the former conservative coalition government. Furthermore, changes legislated in 2002 reduced the period of benefit refusal that can lead to a complete loss of entitlement


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to unemployment compensation payments from 24 weeks to 21 weeks. The amount of ‘wealth’ disregarded when determining the unemployment assistance benefit was also reduced. Finally, at the time of writing (autumn 2003), the federal government has introduced a legislative proposal for a comprehensive reform of payments for unemployed workers. According to this proposal, unemployed workers will be eligible for an ‘Unemployment Compensation Payment I’ during the first year of unemployment, based on the insurance principle. Although there is no intention to further reduce the wage replacement ratio, the possible extended duration of benefit receipt for workers 55 years and older will be limited to 18 months instead of 32 months. 48 The idea behind this measure is to restrict still more the option of taking an early ‘exit’ from the labour market.49 According to a further legislative proposal, all other needy, ‘employable’, unemployed workers – namely, persons between the ages of 15 and 64 who are able to work for a minimum of three hours daily – will receive an ‘Unemployment Compensation Payment II’. Unlike the ‘old’ unemployment assistance benefit, this new payment will be fully means tested. In principle, its level will be set at the monthly social assistance rate of 345 euros in the western states and 331 euros in the east.50 The implementation of this law will lead to greater equality among those who have exhausted their unemployment insurance benefits and those who do not meet the minimum requirements for entitlement to unemployment insurance benefits. It must, however, be emphasised that this reform may lead to substantial benefit reductions for those unemployed workers who had previously commanded a relatively high income and had been eligible for unemployment assistance payments based on a mix of meanstesting (income and wealth test) and social insurance principles (individual replacement ratio).51 If we take a quantitative perspective in evaluating active labour market policies, we conclude that the Red-Green coalition government has further reduced the number of unemployed workers participating in training and public employment programmes, bringing it to the lowest level since unification, despite continued high levels of unemployment (see Figure 4.6 above). Budgetary expenditures for active labour market measures have declined moderately, from 22.8 billion euros in 1999 to 22.4 billion euros in 2002 (BMGS 2003a, Table 8.14A). Cities and counties have continued, however, to expand their various workfare programmes during the tenure of the Red-Green coalition. According to a survey by the German Association of Cities (Deutscher Städtetag), about 400,000 (former) welfare recipients participated in welfare-to-work programmes

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during the year 2000, an increase of about 100,000 since 1998. About 50 per cent of these participants are employed in ‘regular’ employment relationships (Deutscher Städtetag 2001). 52 With regard to qualitative changes in active labour market policies, a major achievement – in the view of the Red-Green coalition government – was the enactment of the 2002 ‘Job Activation Law’. The main aim of this measure – as already to some extent stated in previous laws passed by the former government – was to prevent long-term unemployment. A ‘re-integration contract’ between every unemployed worker and the Federal Employment Service was made obligatory. This contract is based on the individual profile of the unemployed worker and clearly states the responsibilities of the two parties. Also in this vein, all unemployed workers could now, in principle, participate in active labour market measures without having to be unemployed for a specific period of time before being considered for participation. At the same time, the pressure on the unemployed to search actively for jobs was intensified. Unemployed workers would be sanctioned with a 12-week benefit refusal if they (a) did not immediately arrange a job interview after obtaining information about a job opening from the Employment Service, (b) jeopardised the possibility of getting the job due to their conduct during the interview, or (c) failed to show up for the interview (Steffen 2003, p. 25). Following the report of the ‘Hartz Commission’, 53 the Red-Green government enacted substantial changes in 2003, which reformed the Employment Service and refocused the active labour market policy approach. In the past, active labour market policies were largely limited to the reintegration of unemployed workers into standard employment relationships. In contrast, the new measures are intended to promote self-employment, as well as the rapid reintegration of the unemployed into dependent employment relationships, almost regardless of whether or not these jobs fit the category of atypical employment. Unemployed individuals starting their own small business can receive a monthly subsidy of 600 euros during the first year. This is reduced to 360 euros a month in the second year of the business and to 240 euros in the third year. The subsidy will only be granted if the annual income of the newly self-employed does not exceed 25,000 euros. While the newly self-employed may employ family members, hiring ‘regular’ outside workers is not allowed while the subsidy is being received (BMWA 2003, pp. 40–5). A further part of the reform aims at establishing so-called ‘Personnel Service Agencies’, which principally amounts to publicly supporting employment agencies to hire out formerly unemployed workers as


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temporary workers to ordinary private companies. The idea behind this concept is that these temporary workers are put in contact with the regular labour market and at least some of them will eventually remain as permanent employees in one of the companies to which they are hired out (BMWA 2003, pp. 36–8). A third measure aims at encouraging older unemployed workers who have not yet exhausted their unemployment insurance benefits to take up employment at a lower monthly income. The Employment Service will grant these workers an allowance to compensate 50 per cent of their lost net income (compared to the job held before the unemployment spell) for the duration of the remaining benefit entitlement.54 In addition, the requirements for time-limited employment of workers aged 52 and older were made less restrictive in order to encourage employers to hire these workers. Finally, employers who hire a worker over 55 who has not worked for them before are exempted from paying unemployment insurance contributions for this employee (BMWA 2003, p. 48). Other measures are intended to increase competition for the Federal Employment Service in various areas. In 1994 the Employment Service’s monopoly in operating labour exchanges was abolished, but stringent regulations still applied. However, since 2002 private job agencies have no longer been required to obtain special licences to open their business. Furthermore, these agencies are allowed to charge a fee of between 1500 and 2500 euros if they successfully find a job for an unemployed worker. Workers claiming unemployment compensation can receive a voucher from the Employment Service entitling them to the services of private job agencies. Finally, unemployed workers can receive ‘training vouchers’ from the Employment Service for further training. Previously, unemployed workers had only been able to choose from ‘officially’ provided training measures (Steffen 2003, p. 26). To summarise: although it is much too early to judge whether these new measures will reduce unemployment, it must be emphasised that they further ‘undermine’ the normative concept of the wage earnercentred social policy approach, which aims to guarantee the worker’s former living standard. This applies to the instruments of both passive labour market policy and active labour market policy. With regard to passive labour market policies, the previous retrenchment by the conservative government was not reversed. Moreover, the recent proposals even serve to accelerate the process. By defining familial services as equivalent to ‘real’ social insurance contributions, the unemployment insurance scheme, which once constituted a core pillar of the wage earner-centred social policy approach, is becoming more family oriented.

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With regard to active employment measures, the aim of reintegrating unemployed workers into a standard employment relationship, while guaranteeing their occupational status, has largely been abolished. Moreover, unemployed workers are encouraged with subsidies – financed by contributions – to become self-employed, which means that they become ineligible to contribute to the unemployment insurance scheme and eventually lose their unemployment insurance coverage. 55 The establishment of public or publicly-supported companies to hire out workers on a temporary basis to regular, private companies encourages the creation of atypical employment relationships, which is at odds with the traditional concept of the wage earner-centred social policy approach based on standard employment relationships. The same argument applies to the exemption of employers from paying unemployment insurance contributions for older workers. Finally, as has been the case with many measures implemented in the 1980s and 1990s, the public support of jobs with a wage below the worker’s former income clearly undermines the principle of guaranteeing the worker’s former living standard. Summarising the policy changes since the mid-1970s. Since the mid-1970s the realm of labour market policies has, by and large, been characterised by retrenchment leading to an increased recommodification. Yet, two exceptions stand out. Firstly, starting in the mid-1980s, the state used various instruments of labour market policy and early retirement schemes to encourage older workers to exit the labour market early. Second, during the first two years after the formal unification of Germany, the conservative government extensively used active labour market policies to minimise unemployment in the former East Germany. With regard to unemployment compensation benefits, we can argue that the government pursued a more or less continuous approach of withdrawing from the once-dominant aim of securing the achieved living standard of unemployed workers. This approach included the following measures: • Successive incremental reductions in the replacement ratio, especially for workers without children, led to significantly lower unemployment compensation benefits, compared to the mid-1970s, and to an increased proportion of unemployed workers who remained dependent on additional social assistance payments to escape poverty. • Unemployed workers lost entitlement to unemployment insurance benefits and were instead shifted towards the means-tested unemployment assistance benefit. This primarily affected those workers with


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relatively short contributory periods and the long-term unemployed. By abolishing ‘ordinary unemployment assistance benefit’ and tightening the eligibility criteria for ‘regular’ unemployment assistance benefit, certain unemployed workers lost all entitlement to unemployment compensation benefits and hence became dependent on social assistance or the support of relatives. • The extension of periods of benefit refusal has undermined the principle of guaranteeing the achieved standard of living for those unemployed workers who would generally be entitled to unemployment insurance or assistance benefits. • Successive incremental steps tightening the eligibility criteria for unemployment compensation payments, especially the redefinition of what constitutes a suitable job offer, have led to an abandonment of the aim of preserving the occupational status of unemployed workers during spells of unemployment. • By differentiating replacement rates based on family status and by recognising certain familial services as equivalent to ‘real’ unemployment insurance contributions, the unemployment compensation system became more family-oriented. The development of active labour market policy has been something of a roller-coaster ride; measures have frequently been retrenched or expanded, largely depending on the budgetary situation of the Federal Employment Service. Since the mid-1990s we have witnessed a declining emphasis on traditional measures of active labour market policies, such as training and public employment measures. Moreover, efforts by the Federal Employment Service have been increasingly aimed at shifting resources away from financing compensatory unemployment benefits and towards measures directly fostering employment. These measures include subsidies paid to employers who hire unemployed workers, and self-employment subsidies. Promoting self-employment with resources from the unemployment insurance fund seems, in particular, systematically to undermine the previous aim of promoting employment in (standard) employment relationships covered by the unemployment insurance scheme. 56 This strategy might be described as nurturing a process whereby the Federal Employment Service frees itself from its own clientele. Old-age insurance Germany is often viewed as having a generous pension system57 which is largely resistant to change. 58 Accordingly, from the mid-1970s until the late 1990s, the old-age insurance scheme witnessed changes that

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were, on the whole, incremental and technical in nature. This is, however, not to say that the changes were ineffective, since without the adjustments implemented during this period the net earnings replacement ratio for the standard pensioner with 45 years of average earnings would have reached 90 per cent by 1997 (Alber 2001, p. 22) – a 20 percentage point increase compared to the mid-1970s. While the notion of stability dominates most of the period, two major innovations stand out. First, in the mid-1980s a limited time devoted to child-rearing became recognised as equivalent to contributions and was introduced into the old-age insurance scheme and subsequently expanded. Second, in 2001 Germany partially privatised public pensions, which marked an explicit withdrawal from publicly guaranteeing the achieved living standard of pensioners. Social-Liberal coalition (1975–1982). In the early 1970s pension experts estimated that the accrued reserves of the old-age insurance fund would reach about 100 billion euros within 15 years (VDR 2002, p. 13). Yet, the combination of the economic downturn in the mid-1970s and increased pension expenditures as a result of expansions legislated in the early 1970s led to a rapid depletion of the old-age reserves (Nullmeier and Rüb 1993, pp. 117 f.) and forced the Social-Liberal coalition to take action. In order to limit the increase in pension payments, the government initially proposed changing the adjustment mechanism from a method based on gross wage increases to one based on net wage increases. Due to massive opposition, the coalition government withdrew this proposal and finally had to settle on more incremental measures. In 1977 and 1978 the government passed the 20th and 21st Pension Adjustment Laws. These laws included: • a six months’ postponement of the annual benefit adjustments from July 1978 to January 1979; • a technical measure which minimised the effects of the large wage increases of 1974 on future benefit levels; • a cap on benefit increases for the years 1979 to 1981 to 4.5 per cent and 4 per cent respectively. Without the caps the benefits would have increased by 7.2 per cent, 6.2 per cent and 6 per cent (Nullmeier and Rüb 1993, p. 125). In addition to implementing these benefit curtailments, the government bolstered the revenues by increasing the contribution rate from 18 per cent to 18.5 per cent of gross wages.59 The government also obliged the Federal Employment Service to pay contributions into the


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old-age insurance fund for unemployed workers based on the workers’ previous wages. To enhance the short-term liquidity of the old-age insurance scheme further, the government cut the statutory contingency reserve of the pension fund from a level equivalent to three months of benefit expenditures to a level corresponding to one month’s expenditures (Frerich and Frey 1996, p. 228). In 1982 the federal government reduced the basis for its old-age insurance contributions for conscripted soldiers and conscientious objectors engaged in community service from 100 per cent of the average wage to 75 per cent of the average wage. Finally, in 1982, shortly before the constructive vote of no confidence which led to the end of the Social-Liberal coalition, the government passed a law obligating pensioners, who in the past had enjoyed free medical coverage, to pay half of the regular contribution rate to the statutory sickness funds based on the income from occupational pensions (Steffen 2003, p. 29). Summarising the changes that the Social-Liberal coalition enacted in the old-age insurance scheme, we can conclude that the benefit curtailments were incremental and largely designed to keep expenditures under control. Policies of the Christian-Liberal coalition (1982–1998). In the first two years of its 16-year tenure, the Christian-Liberal coalition largely continued on the policy path of incremental benefit reductions and successive increases in contribution rates. In 1983 the new government, like its predecessor, delayed the annual pension increase for six months. Furthermore, it reduced the contributions for conscripted soldiers and conscientious objectors engaged in community service, 60 and based the contribution rate for recipients of unemployment insurance and assistance benefits on the individual level of the unemployment compensation payment. In 1984, in addition to making some other minor changes, the government curtailed the lump-sum benefit for remarried widows. Finally, beginning in 1985, pensioners were obligated to pay contributions to the statutory sickness insurance funds equal to 4.5 per cent of their public pension; in 1987 contributions rose to 5.9 per cent. This measure significantly lowered the effective pension increase for those years. Between 1982 and 1985 the old-age insurance contribution rate rose from 18 per cent to 19.2 per cent of gross wages (Frerich and Frey 1996, pp. 229–32). The implementation of the Survivors’ Pensions and Child Rearing Benefits Law in 1986 represented a major systematic innovation. For the first time in the long history of the German social insurance system, the state recognised the contributions of family carers as equivalent to

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monetary contributions within the old-age insurance system (Götting 1992). Although the time recognised for child-rearing was initially limited to 12 months per child and was based on 75 per cent of the average income, this measure represented a departure from the male breadwinner model within the pension system. The child-rearing credits were designed to help mothers (and fathers) establish their ‘own’ pension entitlement instead of being fully dependent on the benefits derived from the (assumed male) breadwinner during the time committed to child-rearing (Meyer 1998). This 1986 law also substantially changed the survivor’s benefit, granting widowers the same entitlement as widows. Previously, male survivors could only receive the benefit if the deceased wife earned more than half of the household income. Furthermore, a relatively generous means-testing mechanism, excluding, among other things, capital income, income from rent, and fringe benefits from the means test, was built into the survivor’s benefit. The reform measure was triggered by a number of Constitutional Court rulings dating from the 1970s,61 which criticised the unequal treatment of men. In order to prevent the Constitutional Court from explicitly ruling the existing survivor’s benefit as unconstitutional, and to minimise the costs associated with the equal treatment of men, the government introduced the means-testing mechanism (Frerich and Frey 1996, pp. 232–5). Finally, in 1989 a comprehensive pension reform was legislated – the Pension Reform Act of 1992. 62 Taking into account the looming demographic changes,63 the core aim of this reform was to assure the long-term viability of the financing structure of the old-age insurance without having to revert to perpetual stopgap actions, while at the same time maintaining a replacement ratio of about 70 per cent. The Pension Reform Act also aimed to minimise the incentives for early retirement and to emphasise the recognition of family work. The major reform measures were as follows: • The annual pension adjustment was changed from a mechanism based on gross wages to one based on net wage increases (average gross earnings minus income tax and social insurance contributions). Based on the old formula, the net replacement ratio for pensioners would have continuously risen as a result of the increasing difference between employees’ gross and net earnings. According to the law, the net replacement ratio for the standard pensioner was to be kept constant at 70 per cent. • The contingency reserve, the net pension level, the amount of federal subsidies, the level of benefit adjustment and the contribution rate


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were interlocked to create a ‘self-regulating’ (Hinrichs 1993, p. 18) financing mechanism. Since the pension benefit was fixed, the ageing of society would inevitably lead to an increase in pension expenditures. If these increased expenditures depleted the contingency reserve of the old-age insurance fund to a level below one month’s expenditures, the contribution rate and the federal subsidies would increase automatically. Due to lower increases in net wages, caused by the higher contribution rate, the pension adjustment would also be correspondingly lower. • Starting in 2001, the minimum age limit for receiving full old-age insurance benefits would be gradually increased to 65 years for women, unemployed workers and workers with long contributory periods. Although the government did not abolish the option of early retirement at age 63, older workers taking advantage of this opportunity had to accept lower benefits, based on a formula of actuarial equity, leading to a maximum benefit reduction of 10.8 per cent. Workers who had reached retirement age but were willing to continue working could now draw partial pension benefits. Earnings limits for those workers older than 65 were abolished. • Family-oriented instruments were expanded. Specifically, the government extended child-rearing credits from one to three years per child for those children born after 1991. The time spent rearing a child up to the age of 10 would be recognised in determining the minimum contributory period for pension eligibility. • Finally, the Pension Reform Law of 1992 also included a number of minor changes including the following: the time period recognised as equivalent to ‘real’ contributory periods 64 at institutions of higher education was reduced from 13 years to a maximum of 7 years. Instead of crediting the first five years of employment with 90 per cent of the average wage, rather than the usually lower wage of job entrants, only four years would be credited at the higher rate in the future. The Federal Employment Service would pay contributions based on 80 per cent of the previous gross wages for those unemployed workers receiving unemployment insurance or assistance benefits. The unification of Germany presented the statutory old-age insurance scheme with its biggest administrative challenge. Starting in July 1990, three months before formal unification, all four million East German pensions were paid in (West) German marks. The pensions were, however, still based on the existing wage differences in East and West Germany (VDR 1992, p. 14). Finally, in January 1992, through the implementation

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of the Pension Transition Law, the West German pension system became effective in eastern Germany, thereby transforming all former East German pensions into pensions according to West German pension law, based on a complex formula.65 Accordingly, in the late 1990s, as a result of the longer periods of uninterrupted employment in eastern Germany, average pension payments in the east, especially those made to women, were higher than the pensions paid in the west (Bäcker et al. 2000b, pp. 281 ff.).66 Furthermore, a special early retirement benefit was introduced in eastern Germany for workers over 55 years of age (Heinelt and Weck 1998, pp. 64–9). As we have already discussed, this transfer of the West German pension law to the territory of the former East Germany involved huge financial transfers, largely paid for by West German workers. Since the reforms enacted in 1989 and designed to counter the trend towards early retirement were to be phased in over a longer time period, and because workers in the east were granted additional ‘generous’ early retirement options, early retirement skyrocketed in the mid-1990s, functioning, in effect, as a huge labour supply adjustment programme (see Figure 4.7). In 1995, 47.62 per cent of all new old-age pensioners in eastern Germany retired early due to unemployment. 67 In 1996, in an effort to counter this tendency more quickly, the government introduced the option of drawing a special early retirement pension for workers who had worked part time for at least 24 months after reaching the age of 55, according to the regulations of the ‘Part-time Law for Older Employees’ (see above). At the same time, the government

Number of new pensioners

180000 160000 140000 120000 100000 80000 60000 40000 20000 0 1975 1980 1985 1990

1992

1994

1996

1998

Year West Germany

Figure 4.7:

East Germany

Early retirement due to unemployment: 1975–2001

Source: Bundesregierung (2002a, p. 94).

2000


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shortened the phase-in period for raising the age of unemployed workers who could draw full retirement benefits from 60 to 63, now affecting workers born after 1936. In 1997 the government further reduced the opportunities for early retirement due to unemployment. In December 2001 early retirement with entitlement to full pension benefits due to unemployment was abolished. Unemployed workers could still receive pension benefits at age 60, but they had to accept permanent benefit reductions of up to 18 per cent. Similarly, the raising of the special (lower) retirement age for women, as well as for employees with long contributory periods of 35 years or more, was fully implemented earlier than initially stipulated by the Pension Reform of 1992. Furthermore, the government reduced the time period recognised as equivalent to ‘real’ contributory periods at institutions of higher education from seven years to a maximum of three years. Finally, the contributions paid to the old-age insurance fund for unemployed workers were once again reduced.68 Despite the various measures enacted, and in part already implemented, since the early 1990s, the government was not successful in effectively stabilising the old-age insurance contributions. Moreover, old-age insurance contributions rose more or less continuously from 18.7 per cent in 1989 to 20.3 per cent in 1997. Hence, for the first time in history old-age insurance contributions crossed the symbolic threshold of 20 per cent. The increase in contributions was, however, not yet a result of demographic changes, but was primarily caused by unprecedentedly high levels of early retirement and unemployment, especially in the east. 69 According to estimates by Lampert and Althammer (2001, p. 275), the unemployment of one million workers creates an annual shortfall of 10 billion German marks in the old-age social insurance fund, due to the reduced premiums paid by the Federal Employment Service to the old-age insurance fund for unemployed workers. In 1997 average official unemployment reached more than four million, leading to a shortfall of approximately 40 billion German marks over the year. The conservative government reacted to the deteriorating financial situation in 1997 with the legislation of the ‘Pension Reform of 1999’. In addition to ‘solving’ the short-term financial difficulties of the pension fund, this law once again included measures to address future adverse financial developments – triggered by the projected demographic changes – as well as measures to expand the child-rearing credit. With regard to short and medium-term financial difficulties, the government increased the federal subsidy to the old-age insurance fund by raising the value-added tax from 15 per cent to 16 per cent (Hinrichs 1998, p. 21). In addition, expenditures were curtailed by restricting the eligibility

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criteria for disability pensions and reducing their benefit level by an average 7.7 per cent, as well as by gradually raising the retirement age for severely handicapped workers from 60 to 63 years (starting in the year 2000). Finally, under the provisions of this law, early retirement benefits for unemployed and female workers would be fully abolished by 2012 (Hinrichs 1998, pp. 22 f.). In order to secure the long-term viability of the old-age insurance system without having to revert to drastic increases in the social insurance contributions, the conservative government introduced a so-called ‘demographic factor’. This demographic factor implicated a gradual reduction of the replacement ratio from 70 per cent of the prior net wage for the standard pensioner (someone who had worked for 45 years earning an average wage) to 64 per cent by the year 2030. According to this new formula, workers with below average earnings and/or shorter contributory periods would most likely once again be dependent on social assistance during their retirement (Schmähl 1999, pp. 417 ff.; Hinrichs 1998, p. 24). Hence, we can argue that this benefit reduction has substantially weakened the public guarantee of preserving the achieved living standard in old age for a large part of the workforce. However, at the same time, the government liberalised the regulations governing company pensions in order to increase their reach. One key component was the approval of contribution-based schemes, whereas in the past only defined-benefit programmes fulfilled the requirements of the respective regulatory framework (Wirth and Paul 1998). Finally, the government expanded the child-rearing credit from the equivalent of a ‘real’ contribution based on 75 per cent of the average wage to a basis of 100 per cent of the average wage. This measure was to be gradually phased in by the year 2000 and was applicable to present as well as future beneficiaries. If the parent entitled to the child-rearing credit is in an employment relationship covered by the statutory old-age insurance, the paid contributions and the child-rearing credits can accumulate up to the earnings limit.70 This measure became effective only for future beneficiaries (Bleses 2003a, pp. 564–5). Since the introduction of long-term care insurance in 1994, persons caring for elderly or disabled relatives have also been entitled to certain credits, albeit at a lower level (Bäcker et al. 2000b, pp. 270 f.). To summarise: through a series of incremental steps, the conservative coalition made pension benefits more strongly conditional on previous contributions and thereby weakened the measures originally introduced to provide a ‘socially adequate’ retirement income. The likelihood that the pension benefit will lose its function as a wage replacement and


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will come to resemble a social assistance payment has increased, especially for those workers with alternating phases of atypical employment and unemployment, as well as for those who (are forced to) retire early. 71 By reducing the replacement ratio for the standard pensioner from 70 per cent to 64 per cent, the conservative government essentially withdrew from the guiding principle – heralded as the major achievement of the 1957 pension reform – of publicly guaranteeing the achieved living standard within the old-age insurance scheme. The introduction of the child-rearing credit, however, made the pension scheme more family-oriented, with the result that pensions were increased for women. Retirement benefits no longer depend solely on the previous employment relationship (of the typically male breadwinner and female family carer), but having children per se significantly contributes to future pension entitlements. This can be viewed as a systematic departure from the strong male breadwinner model and the wage earner-centred social policies which characterised the post-World War II social policy design. Partially privatising public pensions: the policies of the Red-Green coalition (1998–2003).72 Immediately after coming to power in the fall of 1998, the Red-Green coalition suspended the implementation of two crucial features of the Pension Reform of 1999: the so-called ‘demographic factor’ and the curtailment of disability benefits. The aim of the suspension was to give the new government enough time to develop an original pension proposal of its own that would counterbalance the projected adverse demographic development of the future. Other short-term changes enacted by the Red-Green coalition within the first few months included the introduction of a minimum contribution for certain self-employed workers, which was designed to combat ‘pseudo-self-employment’, and the obligation of workers with ‘insignificant employment relationships’ to pay old-age insurance contributions. Although special criteria applied to these workers in terms of contributions and benefits, they were now, in principle, covered by the old-age insurance scheme. These measures were clearly designed to strengthen the wage-earner principle. But this approach did not last for long. By late 2002 and early 2003, most of these regulations were again liberalised and in some cases the status quo ante was even reinstated (Rose 2003). Furthermore, the Red-Green coalition bolstered the financial situation of the old-age social insurance fund by transferring additional tax revenues to cover the full costs of the child-rearing credits, and by introducing an environmental tax whose revenues were earmarked for the pension system. As we have already mentioned, these additional revenues made it possible

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to reduce old-age social insurance contributions from 20.3 per cent in 1998 to 19.1 per cent in 2001.73 In 2001 the Red-Green coalition government enacted an ‘epochal’74 pension reform. 75 The core aim of this reform was to limit future social insurance contribution increases. According to this legislative measure, the contributions to old-age insurance funds must not be allowed to rise above 20 per cent of the gross wage in 2020 or above 22 per cent in 2030, when the last of the baby boomers will have retired. This limitation was accomplished by the scheduling of a significant reduction in the replacement ratio of the pension benefits to a level of about 64 per cent for the standard pensioner in 2030. 76 In order to compensate for the benefit reduction, workers are encouraged, through public subsidies, to enrol voluntarily in certified private or occupational old-age schemes (Marschallek 2002, pp. 38 f.; 2004). The level of subsidies for workers who enrol in private or company-based programmes depends on their income level and the number of children in their household. Furthermore, the social partners are encouraged, via the tax system, to include old-age schemes in collective bargaining agreements (BMAS 2002a: 114).77 However, even if workers enrol in the various certified programmes,78 there is no guarantee of a defined benefit at the previous level, because the companies offering the various financial products are legally required to guarantee ‘only’ the nominal amount paid into the system. Hence, the overall pension system in Germany is being transformed from a pay-as-you-go system based on the principle of defined benefits to a partially funded system based in part on the principle of defined contributions. According to estimates by the Bundesbank, a 50-year-old worker will have to save an extra 4 per cent of his or her gross pay in order to avoid any income loss in retirement. The additional savings ratio for a 20-year-old worker would have to be 1.5 per cent (Deutsche Bundesbank 2002c, p. 30). Through the progressive nature of the subsidies for those who enrol in the new programmes, the state intends to reduce the negative effects of this partial privatisation on lower-income workers. Nevertheless, contributions for employees who participate in the voluntary programmes will be substantially higher in the future than they would have been without the reform. Contributions paid by employers are largely kept constant (Schmähl 2002b, p. 33). The comprehensive reform also included measures to reduce the survivor’s benefit from a maximum level of 60 per cent to a level of 55 per cent of the deceased pensioner’s insurance benefit, while simultaneously introducing a special supplementary benefit based on the


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number of children brought up by the survivor. If a survivor brings up two or more children, the new special supplementary benefit will more than compensate for the reduction in the survivor’s benefit. This measure once again strengthens the family-oriented dimension within the formerly fully wage earner-centred old-age insurance scheme. In 2002 the childrearing credits within the old-age insurance were expanded for parents working part time, so that they are now able at least partially to care for their children personally, until the children reach the age of 10. This law was applied retroactively, starting in 1992. The state will increase the paid old-age insurance contributions during these periods by 50 per cent, with a maximum limit of 100 per cent of the average contribution (BMAS 2002a, pp. 114 f.) Occupational disability pensions were also reformed as part of the 2001 pension legislation. In the future, workers will no longer draw disability pensions if they are unable to continue to work in their profession or occupation. Instead, they will have to rely on the labour market for an alternative occupation and/or on the regular disability programme (Wollschläger 2001, pp. 283–4). Although the reformed disability insurance programme now treats unskilled and skilled workers in the same way, it represents a significant change for skilled workers, since their occupational or professional achievements are no longer financially protected should specific disabilities keep them from continuing in their profession. Finally, the coalition government de facto introduced a minimum pension, effective 1 January 2003, by essentially revoking the income and wealth test of the relatives of low-income senior citizens79 who apply for social assistance. The law requires all old-age insurance administrators to inform senior citizens with very low pensions that they are entitled to special social assistance for the elderly in addition to their standard insurance benefits (Buhr 2003). Overall, the reform measures enacted by the Red-Green coalition government can be characterised as a partial privatisation of the old-age and disability insurance system, minimising its decommodification potential, while at the same time expanding family-oriented benefits. The government explicitly withdrew from the principle of publicly guaranteeing the achieved living standard. It must, however, be stressed that by subsidising the private pension schemes, the state offers incentives for low and middle-income workers to participate in the new programmes. By introducing the special social assistance benefit for senior citizens, the Red-Green coalition intends to improve the conditions of very low-income senior citizens. 80

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Summarising the policy changes since the mid-1970s. The development of the public pension programme since the mid-1970s is characterised by four policy streams. In the first place, starting in the late 1970s policy makers repeatedly adjusted the benefit and contribution formulas in order to correct short-term financial difficulties, which arose largely because of adverse economic developments and increased unemployment. These measures did not, however, lead to substantial net benefit reductions for the average pensioner. In fact, without these curtailments the pension levels would have risen significantly. The second policy stream, starting in the mid-1980s, was focused on introducing familyoriented elements into the pension system, while at the same time gradually withdrawing from commitments previously made to survivors, whose benefits were derived from the entitlement of the (male) breadwinner. It is important once again to stress that entitlement to these new family-oriented benefits within the old-age insurance system is solely dependent on the provision of certain familial services or on the existence of children and not on wage labour covered by the statutory pension system. Financial transfers from the federal government out of general tax revenues are largely to cover the costs of these benefits for the time being. In the late 1980s policy makers began to address the issue of the long-term financial viability of the statutory pension system. They feared that if no policy adjustments were implemented, the pension system would be undermined by future demographic developments. Overall, this third policy stream focused on gradually terminating the various options for early retirement. However, this approach was thwarted for some time by the introduction of a special early retirement entitlement for citizens of the former East Germany. By designing a complex formula linking future benefit adjustments, old-age insurance contributions and federal subsidies, the government intended to distribute the demographic burden equally among the young and old. However, in the late 1990s and early 2000s, setting a maximum level for future increases in social insurance contributions became the paramount goal of all future reforms. This constituted the fourth policy stream. The goal of limiting future social insurance contributions was achieved by a gradual and substantial reduction of the replacement ratio and, in effect, a withdrawal from the guarantee of publicly maintaining the achieved living standard of pensioners. As partial compensation for the effect of this approach, the state initially promoted and eventually began to subsidise private and company pension plans. The introduction of a de facto minimum pension benefit was designed to put an end to old-age poverty.


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If we review these four policy streams together we witness a substantial weakening of the wage earner-centred approach in the realm of securing the income of senior citizens. Pension rights can now also be established by means other than social insurance contributions based on earnings. By reducing the average pension benefit, while at the same time introducing a de facto minimum pension, the ‘achievement incentive’ for wage earners – historically deliberately built into the pension system – will be minimised within the statutory pension system. In the future, retirement income will be based less on previous wage income and increasingly on the individual’s private and company pension plans, as well as on tax-financed benefits. Expansion of family policies During the golden post-World War II era, public social policies intended to support the ‘traditional’ family as an institution were largely derived from the wage earner-centred social policy entitlements of the (male) breadwinner. Even the system of child allowances, initially also fully wage earner-centred, only slowly developed into a family-oriented benefit that was not primarily based on the model of an ‘ideal family’ with a male breadwinner earning a family wage. Family-oriented social policies were introduced and expanded by and large in parallel with the curtailments of wage earner-centred social policies. This process began during the tenure of the Social-Liberal coalition, accelerated during the second term of the Christian-Liberal coalition, and continues to be pursued by the Red-Green coalition government elected in 1998. Family policy of the Social-Liberal coalition, 1975–1982. In 1975, the year in which the retrenchment in wage earner-centred social policies began, the Social-Liberal coalition government introduced a child allowance for the first child, abolished the means test for the child allowance for the second child, and substantially raised the allowances for additional children. At the same time, the government abolished the child tax allowance, which had primarily benefited upper income parents (Frerich and Frey 1996, p. 118). During its tenure the Social-Liberal government continued a gradual expansion of child allowances for families with two or more children (Bleses and Rose 1998, pp. 147 f.), except in 1982, when the allowances for the second and third child were once again (moderately) reduced as part of an attempt to control federal expenditures (see Table 4.1). Furthermore, in 1979 the government initiated a policy that was intended to help women remain in the workforce after giving birth by

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Table 4.1:

Development of monthly child allowance benefits: 1970–2002

Period

Monthly benefits in euros 1st Child 2nd Child 3rd Child 4th and each additional child6

01.09.1970–31.12.1974 01.01.1975–01.12.1977 01.01.1978–31.12.1978 01.01.1979–30.06.1979 01.07.1979–31.01.1981 01.02.1981–31.12.1981 01.01.1982–31.12.1982 01.01.1983–30.06.1990 01.07.1990 –31.12.19914 01.01.1992–31.12.1995 01.01.1996–31.12.19965 01.01.1997–31.12.1998 01.01.1999–31.12.1999 01.01.2000–31.12.2001 Since 01.01.2002

– 26 26 26 26 26 26 26 26 36 102 112 128 138 154

131 36 41 41 51 61 51 36–512 36–662 36–662 102 112 128 138 154

31 61 77 102 102 123 112 72–1122 72–1122 72–1122, 3 153 153 153 153 154

31 61 77 102 102 123 123 72–1232 72–1232 72–1232, 3 179 179 179 179 179

Notes: 1. Means-tested benefit. 2. Starting 01.01.1983, child allowances for the second child and each additional child were subject to means-testing. Each second child was entitled to a minimum benefit of 36 euros; each third child and each additional child was entitled to a minimum benefit of 72 euros. 3. In 01.01.1994, further means-testing mechanisms were introduced for the child allowance for the third child and for each additional child. The minimum benefit for those children was reduced to 36 euros. 4. From 1991 on, data is for a unified Germany. 5. Since 1996 parents have been able to choose between receiving a child allowance and a child tax allowance. 6. From 1964 to 1974, the child allowance for the fifth and each additional child was 5 euros higher. Source: BMF (2001, p. 41).

introducing an extended maternity leave and a maternity leave benefit. Before the enactment of this new law, mothers were entitled to only eight weeks’ maternity leave after giving birth, during which time the sickness insurance funds provided maternity leave benefit. Now, mothers in jobs covered by the statutory social insurance schemes could take advantage of four additional months of leave and a maximum monthly leave benefit of 750 German marks (383 euros). 81 This extended leave was intended to give working mothers the opportunity to care personally for their newborn children for a limited time. Insurance coverage in the


81

statutory sickness, unemployment and old-age insurance schemes continued during this period without the mother or the employer having to pay contributions. Employers could not dismiss mothers during their maternity leave or for two months thereafter (Frerich and Frey 1996, p. 330). This new entitlement was limited to mothers in employment relationships covered by the statutory social insurance schemes. It therefore excluded self-employed mothers, mothers not engaged in the labour market and fathers. The introduction of this new maternity leave benefit can be characterised as the last (successful) attempt by the government to introduce wage earner-centred benefits into the realm of family policy. Christian-Liberal family policies, 1982–1998. In accordance with its overall strategy of budgetary consolidation, the Christian-Liberal coalition government included elements of family policy in its initial retrenchment measures. In 1983 it once again introduced elements of means testing into the previously universalised system of child allowances. Although the coalition kept the child allowance for the first child unchanged, the introduction of means testing affected the child allowances for the second child and each additional child. Parallel to these changes, the government (re)introduced the dual system of family support benefits. In addition to receiving child allowances, parents could now once again receive a child tax allowance of up to 221 euros. This allowance had been abolished by the Social-Liberal coalition government. Since the mid-1980s, the continuous expansion of these child tax allowances (see Table 4.2) has constituted a core element of the conservative strategy to support families financially (Münch 1990, pp. 70 f.). Due to the progressive nature of the income tax system, the child tax allowances had unequal distributional effects. Parents with higher incomes gained more from these tax allowances than middle and lowincome families. Middle and low-income families benefited only partially and families with no taxable income did not benefit at all, due to their overall low or non-existent tax liability (Bleses 1994, p. 186). In 1986 the Christian-Liberal coalition government introduced a supplemental child allowance for those families who did not gain from the tax benefits. Between 1986 and 1995 these monthly allowances, paid in addition to the regular child allowance, were increased from 24 euros to 33 euros (BMF 2001, p. 41). The new three-tiered system was over complicated and in a number of cases, the Federal Constitutional Court ruled that the level of benefits was ‘insufficient’. Moreover, it stated that child (tax) allowances should

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Table 4.2:

Development of child tax allowances: 1962–2002 Annual child tax allowance in euros

Tax years 1962–1974 1975–1982 1983–1985 1986–1989 1990–1991 1992–1995 19961 1997–19991 2000–20011, 2 20021, 3

1st Child

2nd Child

3rd and each additional child

614 – 221 1270 1546 2098 3203 3534 5080 5808

859 – 221 1270 1546 2098 3203 3534 5080 5808

920 – 221 1270 1546 2098 3203 3534 5080 5808

Notes: 1. Since 1996 parents have been allowed to choose between receiving a child allowance and a child tax allowance. 2. Including a childcare tax allowance of 1548 euros. 3. The childcare tax allowance and the child education tax allowance are replaced by a unified tax allowance of 2160 euros. Source: BMF (2001, p. 43).

be designed to meet the needs level for each child as defined by the social assistance law. 82 As a result, the three-tiered system of child allowances was completely overhauled in 1996, leading to systematic changes and a substantial increase in the child allowance and child tax allowances (see Tables 4.1 and 4.2). Parents could no longer receive both allowances, but had to opt for just one of them.83 At the end of each year, the tax office determines which of the two options would have been more beneficial to the filing parents and accounts for the difference in the tax reimbursement. Although a small minority of high-income families are still better off receiving the child tax allowance, the overwhelming majority of parents receive the monthly child allowance benefit (Dingeldey 2001, p. 204). In January 1997 the conservative government further raised both the child allowances and the child tax allowances. This increase in child allowances has been only one sector of activity within the overall strategy of expanding family-oriented social policies since the mid-1980s. The most innovative expansion of family-oriented social policies was achieved by the introduction of parental leave, parental (leave) benefit and child-rearing credits within the old-age insurance programme.84 In 1983 the extended maternity leave benefit was cut from 383 euros to 261 euros per month, and in 1986 it was replaced by the


83

introduction of a parental (leave) benefit. The new benefit was open not only to working mothers with employment relationships covered by the statutory social insurance schemes, but to all parents, who would be entitled to receive the new flat monthly parental (leave) benefit of 307 euros (600 German marks) independently of any prior employment relationship. This benefit was designed to remove the (financial) discrimination against those parents who had chosen the traditional model of family life even before the birth of a child, namely, a married couple with one partner gainfully employed as the (usually male) breadwinner and the other partner (usually the wife) committed to familial services. Moreover, the parental (leave) benefit also entitles fathers. The new benefit gives parents the freedom to choose whether to continue to work or whether to opt out of the labour market and commit themselves to child-rearing for a limited time period. The employer must guarantee the parent re-employment in a similar position and with equivalent remuneration following the parental leave. Parallel to parental leave, parents were allowed to work in a part-time position with a weekly work schedule of up to 19 hours (Münch 1990, pp. 59 ff.). From 1992 on, the opportunities for working parents to take leave during a child’s sickness were also substantially improved. Each parent is now entitled to a maximum of 10 days’ annual leave to deal with spells of sickness for a child up to the age of twelve. Working parents with more children are each entitled to a maximum of 25 days’ leave; single parents are entitled to 20 days’ leave per child up to an annual maximum of 50 days. During these periods of leave parents are entitled to receive a sickness benefit equivalent to 70 per cent of the gross wage, paid for by the sickness insurance funds (BMAS 1994, pp. 72 f.). Up to 1993 the conservative government gradually extended the parental leave period as well as the length of time for which parental (leave) benefit would be received; both had initially been limited to ten months. The period for receipt of the parental (leave) benefit was extended to a maximum of 24 months and parental leave itself was extended to 36 months. From 1986 to 1993 receipt of parental (leave) benefit was universal during the first six months; receipt after the sixth month was means-tested. From 1994 the benefit receipt during the first six months was also made subject to a means test (Bleses and Rose 1998, pp. 152 f.). However, much more generous income limits were effective than those applied after this initial six-month period with the consequence that only very few parents lost entitlement as a result of the introduction of means-testing. The implicit disentitlement of parents which resulted from a lack of adjustment of the income and benefit levels was much greater. Whereas in

84


1987 about 84 per cent of all parents with children aged six months and older had received the full parental (leave) benefit, in 2000 this was only the case in about 47 per cent of all families living in western Germany. Some 32 per cent of the families received a reduced benefit and 21 per cent received no benefit at all. In eastern Germany the percentage of those receiving the full benefit declined from 97 per cent in 1991 to 77 per cent in 2000 (BMFSFJ 2003, p. 251). Through the non-adjustment of the benefit level, the real value of the benefit dropped from 600 German marks to about 460 German marks in 1999 (Koch 2000, p. 591). The introduction of parental leave, child-rearing credits within the pension system and leave for working parents to care for their sick children substantially increased the compatibility of employment and family responsibilities. Yet, one major social problem was left unresolved: how to reconcile the responsibilities of family and employment after the end of the three-year parental leave period, bearing in mind the insufficient childcare facilities for children between the ages of three and six? In 1992 the government enacted the right to a place in a childcare facility for every child between the ages of three and six, to become effective by 1996. Due to implementation problems as well as to the initial reluctance of local authorities to comply, the law was fully implemented only in 1999, after a further transition period. Between 1992 and 1999 an additional 600,000 places in childcare facilities were created for this age group (Bäcker et al. 2000b, p. 212). Although the provision of childcare facilities has improved substantially for three to six-year-olds, improvements for other age groups have been modest (see Table 4.3). Furthermore, despite the improvements at the aggregate level for the Federal Republic of Germany, substantial regional differences in the provision of childcare persist, primarily – but not only – between east and west. In 1998, for example, the respective ratios of places for children between the ages of three and six varied between 153 per cent in Thuringia and 76.5 per cent in Hamburg. For toddlers under the age of three, the differences were even more pronounced, the ratio being only 2 per cent in Bavaria and Baden-Württemberg and 79 per cent in the state of Brandenburg (BMFSFJ 2003, p. 119). Furthermore, in the late 1990s state governments started to introduce ‘reliable elementary school’85 education – applying consistent schedules – as well as after-school programmes, thereby contributing to the improved provision of childcare for pupils. The Red-Green coalition, 1998–2003. The Red-Green coalition continued to expand family policies, albeit in a somewhat accelerated fashion compared to the previous government. This expansion took place along


85

Table 4.3: Supply of childcare facilities (number of places as a percentage of age group): 1975–1998 Year

1975 19851 1990 19952 1998

Age 0 < 3 Years

3− 6.5 Years

6 −12 Years

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