This research project aims to analyze the links between the degree of labor market flexibility, marginal employment ("geringfuegige Beschaeftigung") and the institutional arrangements that lead to the creation of a low wage sector in Germany. In the on-going economic and political discussion, the development of a low wage sector is seen to have great potential to increase labor market flexibility and and to serve as a prerequisite for reducing the unemployment rates of low-skilled workers. The current labor policy reforms in Germany aim at increasing labor supply incentives by both, subsidizing social security contributions and reducing social transfers. In our project, we want to analyze how these recent reforms effect the employment in the low wage sector. For this evaluation, we will use our tax-benefit model (STSM), that includes a microeconometric household labor supply model on the basis of data from the German Socio-Economic Panel (GSOEP).