Subsidising Social Insurance Contributions in the Low-wage Sector: Lacking in Precision and too Expensive

Abstract

The risk of becoming unemployed is particularly high for the low-skilled. Moreover, the chances of an unskilled unemployed person re-entering employment is also significantly lower. As a rule low skills mean low productivity, which evidently means that it is often not worthwhile for firms to employ them at the given wage level, particularly in phases of rapid structural change. In order to improve the labour market chances of the low-skilled, while at the same time ensuring that they have an 'adequate' income level, the so-called 'benchmarking group' that forms part of the Alliance for Jobs is considering a proposal for degressive subsidisation of social insurance contributions for employment relationships generating a low monthly income. This concept poses a number of problems. It favours already existing employment relationships (dead weight effects), it requires a very substantial resource input, and will be of little help in assisting the long-term unemployed to find work; only targeted support measures will be effective here. Moreover, the distributional effects are not adequately congruent with the measure's goals in terms of helping those in need. Given that experience has been gained with such models in France and the Netherlands, experiments in Germany are not expected to be successful.