Chapter 7C. Germany
- Kalpana Kochhar, Sonali Jain-Chandra, and Monique Newiak
- Published Date:
- February 2017
- Joana Pereira
The German population is expected to decline markedly in coming decades. Eurostat numbers project the decline in Germany’s population to be 7½ percent by 2050—the third-largest in western Europe, after Greece and Portugal. Without immigration, the natural decline would be almost 19 percent. At the same time, the population will also age rapidly. According to the latest Federal Statistical Office projections, the old-age dependency ratio—the ratio of the number of people ages 65 or more to the number of people ages 15 to 64—is set to rise from the current 32 percent to about 53 percent by 2050 (and broadly stabilize thereafter). By then, Germany’s working-age population (ages 15–64) is expected to be 14 percent (about 9½ million) lower than today.
Potential GDP growth is expected to decline concomitantly, and fiscal expenditures on pensions and health care should show a significant rise. Using a simple analysis that assumes two-thirds of production inputs are attributable to labor and employment rates remain constant, the decline in the working population alone would reduce yearly potential growth by 0.4 percent on average through 2050. This contrasts with the current potential growth estimate of 1.3 percent. Aging may also affect productivity and composition of demand. Furthermore, the shift in the old-age dependency ratio will put pressure on public finances. Using similar population projections, the authorities estimate old-age-related spending to rise between 2½ and 5½ percent of GDP by 2050 (depending on labor market and other economic assumptions), which, if unaddressed, will eventually lead to higher social security contributions, reductions in other government spending, or a steep rise in debt.
How can these trends be mitigated? This analysis focuses on how increasing female labor force participation can counteract the economic impact of aging in Germany, apart from the relative importance of complementary factors such as immigration, elderly labor participation, and fertility. Based on labor force statistics and insights from existing analytical studies, policy options to boost female labor force participation are presented and discussed.
Female Employment: High Participation, Low Hours
Female labor force participation rates are relatively high in Germany. In 2015, about 73 percent of working-age women in Germany either had or were actively searching for a job, compared with a participation rate of 82 percent for men (Figure 7.19, panel 1). Within western Europe, the rates are higher only in the Scandinavian countries, Switzerland, and the Netherlands. Starting at about 61 percent in 1995, German female labor participation has been increasing steadily, with some acceleration in the mid-2000s. By contrast, male participation rates have been mostly stable.
Figure 7.19.Germany: Selected Female Labor Force Indicators
Sources: Eurostat; and Organisation for Economic Co-operation and Development.
Average working hours are relatively low for women, however, particularly for those with family responsibilities. About 46 percent of female workers are not employed full time. Consequently, women work on average 30.4 hours a week, compared with 39.3 hours for men. Unlike the labor force participation rate, average working hours by women have declined since reunification (though they have stabilized at current levels since 2008), with the share of part-time workers having increased over time. Indeed, the rise in participation rates over the last two decades coincided with an ever-larger share of part-time female workers (Figure 7.19, panel 2). One explanatory factor seems to be the expansion of minijobs1 since the mid-2000s, as two-thirds of exclusive minijobs workers are women. Other possible reasons include the increased availability of childcare facilities—encouraging previously nonworking women to work part time—and some structural shifts in the economy toward services (which are more favorable to part-time work arrangements).
The gender gap in working hours develops early in women’s careers and has a persistent impact over time for married women with children. The average number of hours worked by childless married women remains broadly constant through their working life, but for married mothers it is cut by almost half when the age 30–39 cohort is compared with the under-age-30 cohort. The number of working hours for older married mothers falls even further (Figure 7.19, panel 2). Thus, part-time employment is estimated to contribute to half of the 22 percent gender wage gap in Germany (OECD 2014b).
Fiscal disincentives deter stronger female labor force participation. Germany has the third-highest marginal effective tax rates on secondary earners among advanced economies—lower only than those of the Netherlands and Switzerland, where the number of hours worked by women is even smaller. The German marginal effective tax rate for secondary earners is over 50 percent, leading to a tax wedge—the difference between gross income and after-tax income—disparity between primary and secondary earners of 21 percent (Hüfner and Klein 2012; OECD 2013, 2014a).2
The high burden on secondary earners is explained by two factors: the system of joint taxation among married couples (which leads to a larger marginal tax rate for the second earners than a single person with the same income would face3) and the loss of free health care insurance for nonworking spouses when they work in any jobs other than minijobs. A recent report prepared for the Ministries of Finance and Family Affairs evaluated the socioeconomic effects of various family public policies in Germany. The report estimated that the overall effect of the joint tax filing on labor supply—as opposed to fully individual taxation—is equivalent to the loss of 161,000 full-time equivalent (FTE) working women (the effect on male labor supply is positive but much lower, at 33,000 FTEs).4 The report found that the loss of health insurance for second earners causes an equally sizable loss in labor supply. For women with children, the cost of childcare is an additional disincentive to take up work, even though subsidized childcare is provided by the government. Other elements of the tax/benefit system, in particular child benefit payments for nonworking parents, contribute to income stability through early childhood, when parents (typically mothers) may wish to spend more time off work.
While subsidized childcare is provided by the government, an insufficient supply of childcare services and after-school programs is another important constraint to workforce participation. There is a widespread perception that the supply of high-quality childcare services is insufficient to meet demand. The lack of after-school programs is another important factor discouraging women with children from working full time. Under the current tax/benefit system, 11.5 percent of currently employed women (a quarter of part-time workers) would like to work longer hours, according to a recent government report.5 According to the Organisation for Economic Co-operation and Development (OECD) Social Expenditure Database, preprimary (childcare plus preschool) education spending in Germany was 0.5 percent of GDP in 2011, below the OECD average of 0.8 percent. Less than 0.1 percent of GDP was allocated to childcare. Although this allotment has recently increased (by an estimated 0.15 percent of GDP through 2015), it is still much lower than the 2011 average in the rest of the OECD (0.4 percent of GDP).6
The enrollment rate of children under age three in formal childcare was about 29 percent in 2013, compared with 35 percent on average in the OECD country. The government report mentioned elsewhere assesses positively the labor supply impact of publicly subsidized childcare in Germany, estimating the total gain as the equivalent of 100,000 FTEs—that is, a 2 percentage point increase in the participation rate and a 16 percent increase in hours worked of mothers with children under 12 years—with an annual cost of slightly less than 0.1 percent of GDP. The vast academic literature on this subject points to similar conclusions. (For example, see Wrohlich 2008, 2011 and Bick 20167 for Germany, and Thévenon 2013 for the OECD.)
Can Women Save Germany’s Future Growth?
A menu of options is available for raising the female labor supply in Germany.
Expand high-quality, publicly provided childcare and after-school programs—This may be preferable to a policy of simply offering more generous subsidies, as the estimated impact on labor supply would be larger (Wrohlich 2011), in particular among higher-income households.
Target other forms of child-related financial support (namely to nonworking parents) narrowly to low-income households—Doing this would also tilt incentives in favor of seeking or retaining full-time employment and would allow parents to preserve skills, thereby accruing more income in the long term.
Move toward a system of individual taxation—This would encourage more labor supply by secondary earners, most of whom are women. Although pure individual taxation may not be compatible with the German constitution, a system of tax credits for secondary (or lower-paid) spouses that are phased out as individual income increases, as proposed in Hüfner and Klein (2012), could be an alternative option.
Limit or even eliminate the different treatment of health care insurance beneficiaries—This would also reduce incentives for women to stay out of the labor force (or to stay in minijobs). Options range from equalizing contribution rates for all insured persons, regardless of work status, to introducing some differentiation in single contribution rates according to the number of family members insured. Targeted support could be provided for low-income households.
Policies needed to address disincentives to women working in full-time jobs are complementary. Both fiscal disincentives for secondary earners and the under-supply of childcare and after-school programs constitute important barriers to increasing the number of hours worked by women. Lifting just one of these restrictions may have only a limited impact. Therefore, addressing both problems in tandem is important for broadening the choices available to women. For example, the success of Scandinavian countries, most notably Sweden, in sustaining relatively high fertility rates, together with a large share of female full-time workers, has been attributed to the combination of a relatively low tax wedge for secondary earners and comprehensive support for working couples with young children (including high per child government spending).
Two Game-Changing Scenarios
Assuming constant labor market structures—in terms of the share of working men and women and the average number of hours worked—the projected 14 percent decline in the working-age population by 2050 represents an equally large fall in total hours worked. Reducing the share of women who work part time while keeping or raising current female participation rates would significantly lessen the economic impact of the aging population.
What would happen if by 2050 German women were working at the same rate as Swedish women (80 percent participation, with a weekly average of 34 working hours) or as many hours as German men? Either scenario would undo the expected decline in Germany’s working-age population.8
As a group, Swedish women work 23 percent more hours than German women (the joint effect of higher participation rates and more average working hours per woman), while there is a 29 percent difference between female and male average working hours in Germany. Considering that 47 percent of jobs are currently held by women in Germany, the two scenarios would lead to, respectively, a 9 or 12 percent increase in total hours worked, largely mitigating the effect of demographics. The benefits would go beyond the mechanical impact on potential growth. For example, increased contributions to social security would help finance the expected increases in pension and health spending, and provide a better balance overall between the coverage of beneficiaries and contributors.
These policies might entail a limited cost, but one that would be recouped over time. To assess the relative merit of these types of policies, their cost-effectiveness, as well as how the supply of women in the labor market might be affected, must be measured. Results of previous research vary, so it is impossible to provide a definitive conclusion. Nevertheless, as an illustration, Wrohlich (2011) estimates that expanding the availability of childcare while making access conditional on the mother taking up work increases the female labor supply by 16 percent (hours worked by 12.4 percent and participation rate by 3.9 percent).9 This comprises more than half of the total gap between Swedish and German women—and entails an annual fiscal cost of 0.1 percent of GDP.10
Removing the current tax disincentives for full-time work does not necessarily imply a revenue loss, and may often generate a direct fiscal gain. Bick and Fuchs-Schundeln (2015) estimate that changing the tax code so that married couples file separately instead of jointly would result in a strong labor supply response among married women, with 16 percent higher participation and 9 percent more hours worked. They also estimate that reforming the system for providing health insurance coverage to married couples does not necessarily imply an overall revenue loss.
2016. “The Quantitative Role of Child Care for Female Labor Force Participation and Fertility.” Journal of the European Economic Association14 (3): 639–68.
2015. “Taxation and Labor Supply of Married Women across Countries: A Macroeconomic Analysis.” CEPR Discussion Paper 9115, Centre for Economic Policy Research, London..
2012. “The German Labour Market: Preparing for the Future.” OECD Economics Department Working Paper 983, Organisation for Economic Co-operation and Development, Paris..
Organisation for Economic Co-operation and Development (OECD). 2013. Taxing Wages.Organisation for Economic Co-operation and Development, Paris.
Organisation for Economic Co-operation and Development (OECD). 2014a. OECD Economic Surveys: Germany 2014.Paris: Organisation for Economic Co-operation and Development, Paris.
Organisation for Economic Co-operation and Development (OECD). 2014b. Germany, Keeping the Edge: Competitiveness for Inclusive Growth.Paris: Organisation for Economic Co-operation and Development, Paris.
2013. “Drivers of Female Labour Force Participation in the OECD.” OECD Social, Employment and Migration Working Paper 145. Organisation for Economic Co-operation and Development, Paris.
2008. “The Excess Demand for Subsidized Child Care in Germany.” Applied Economics40 (10): 1217–28.
Minijobs are jobs exempted from social security contributions, including for health care insurance, which are defined by a certain monthly wage cap (currently 450 euros). They thus entail only a few hours of work a week.
This marginal rate refers to net income loss for a couple in which the primary earner receives the average wage and the secondary earner moves to working from not working. The difference in the tax wedge is calculated by comparing single tax payers receiving the average salary and secondary workers receiving two-thirds the average salary.
The higher marginal tax rates on the second earner is a consequence of the constitutional provision for income splitting among couples, known as Ehegattensplitting. The German constitution foresees that each person in a married couple is entitled to half of the couple’s earnings. Thus, the relevant income tax bracket for a couple is the one that generally applies to half of the total income of husband and wife. Given the progressivity of the personal income tax code, the couple’s total tax burden is reduced (relative to separate tax filing), but the marginal tax rate for the second earner is higher than for a single person with the same income. Correspondingly, the primary earner’s marginal tax rate is lower than for singles with the same income, but this is unlikely to stimulate labor supply since these workers are typically already employed full time.
The report can be found at: http://www.bmfsfj.de/BMFSFJ/familie,did=209192.html. Various academic studies have also studied this issue, with consistent conclusions. See, for example, Bick and Fuchs-Schundeln 2015, and Thévenon 2013.
Fortschrittsbericht 2014 zum Fachkräftekonzept der Bundesregierung: www.bmas.de/DE/Service/Publikationen/a758-14-fortschrittsbericht-fachkraeftekonzept.html.
Comparisons made on the basis of spending per child (in purchasing-power-parity terms) present a similar picture. Although spending in preprimary education is at about OECD average, spending on childcare is less than half the average.
Bick (2016) argues that the impact of expanding subsidized childcare on the labor participation rate of mothers (extensive margin) would probably be limited; however, a larger share of working mothers would shift to full-time jobs (intensive margin) with greater access to subsidized childcare.
The exercise abstracts from potential differences in productivity across groups, and assumes constant employment rates over time.
The impact is slightly smaller than the one implied by the report discussed elsewhere here.
In the case of after-school programs (which have been less well studied), education spending per child would increase steeply with age, but the cost of after-school programs is likely not as high as that of regular instruction.