P16

P 16 -Labor market flexibility and subsidized social security contributions on low-earnings � A microsimulation study for Germany P 16 -Labor market flexibility and subsidized social security contributions on low-earnings � A microsimulat

Project Leader:
Prof. Dr. Viktor Steiner

Project Team:
Dipl. Volkswirt Kai-Uwe Müller

This research project aims at analyzing the links between the degree of labor market flexibility, marginal employment (so-called geringfügige Beschäftigung), and the institutional arrangements required to foster low-wage employment in Germany. In the current economic policy debate changes in institutional arrangement are considered to be a prerequisite for improved employment prospects and for the reduction of long-term unemployment on heterogeneous labor markets, particularly with respect to low-skilled unemployed. One important policy reform aimed at improving work incentives concerns subsidized social insurance contributions levied on low earnings. Such a reform has recently been implemented in Germany, and further changes with similar aims, such as reducing health insurance contributions on low earnings, are currently under discussion in Germany. This research project will investigate (i) the mechanism of how and to what extent the existing system of the financing of social security contributions impacts on potential increases in the flexibility of heterogeneous labor markets; (ii) the effects of the present social reforms on employment prospects in the low-wage sector of the economy, (iii) how potential gains in flexibility can be realized by the implementation of alternative reforms resulting in increased total employment and reduced unemployment of low-skilled people in Germany, and (iv) what the welfare effects of such reforms might be. The primary methodological challenge is to identify and to estimate labor market effects of specific policy reforms aimed at the promotion of marginal employment when there are simultaneously changes in other regulations that result in similarly expected effects on the labor markets, such as the reform of social assistance and the unemployment compensation system as recently implemented in Germany. For this purpose we will develop a microsimulation model for Germany to model the complex consequences of the present social reforms in Germany with regard to the budget constraints of private households and to infer their effects on the incentives to work. The microsimulation model contains a household labor supply model that is estimated micro-econometrically using data from the Socio Economic Panel for Germany. In the research project this model shall be extended to account for fixed costs of employment, working-time constraints and dynamic labor supply effects, to be able to adequately represent the decision to take up work at low wages. Another extension concerns the integration of demand-side effects into the microsimulation model.