We need to distinguish between transfers linked to previous income (wage replacement payments) for people placed at a disadvantage by structural change and needs-based assistance for individual social groups, notably people on low incomes. Of course, needs- based income support is an elementary social-policy task going beyond purely distributive purposes, even if this task has become more charged as a result of structural change. This type of support aims to secure a basic income and should be designed accordingly. That implies, for example, taking family status and most particularly the number of children into account when calculating the level of the transfer. The costs of healthcare insurance should also be included. How to provide for incomes that will secure the basic necessities of life has been a subject of robust debate in Germany for some time.38 Some observers entertain the illusion that minimum wages could serve to guarantee minimum living standards. But even in the past, wages have often failed to do this. Low-skilled workers with larger
38
Urban Mauer (2006): Kombilohn – Was es für den Erfolg braucht. Chancen für den Arbeitsmarkt nutzen. Deutsche Bank Research. Aktuelle Themen 366. Frankfurt am Main.
Different combi-wage models
Group-specific support in the US
EU globalisation fund Minimum wages send out wrong signals
families, say, have traditionally been dependent on state aid. In the wake of globalisation the number of people affected has undoubted- ly increased, even if the broadened low-wage sector in Germany can by no means be equated with the “working poor”. Nonetheless, minimum wages send out the wrong signals. Wages in excess of productivity force employment into the shadow economy or abroad. Good intentions cannot cancel out these effects. Precisely in Germany with its strong tradition as a welfare state, there is a severe risk of minimum wages being set at a high level or of
politicians finding themselves under constant pressure to do so. The minimum wages abroad touted by protagonists cannot dispel these concerns. In France, for example, minimum wages are deemed a major cause of high youth unemployment. In the UK government-set wages refer to only small sections of the workforce; moreover, experts say they are undermined by other factors such as longer working hours.
The means of choice for income support is not therefore state- imposed minimum wages but the (needs-based) augmentation of market wages, for which the term “combi-wage” stands. Combi- wages are intended to top up the low market wages for low- productivity workers with state supplements. There are various combi-wage models.39We can confine ourselves here to two aspects, which are also the subject of international discussion. One feature of combi-wages is where they kick in. As a rule, models of this kind entail the government’s topping up productivity-linked compensation by means of direct transfers to low earners. However, exactly the same distributional effect can be achieved with payments to companies. For this, the government would make grants to companies that recruit low-productivity workers, enabling firms to pay wages above the marginal value product of labour. But despite the similar effect on incomes, there are powerful arguments here for direct transfers and against grants to companies. For one thing, it is far easier to gear direct support to personal circumstances,
particularly the recipient’s neediness, whereas payments to
companies are fundamentally exposed to a higher risk of imploding into freeloading effects or – even worse – of triggering “revolving door” effects (replacement of non-subsidised by subsidised workers). What is more, the award of funds to companies may involve considerable administrative work to check that the grants are used for the intended purpose. That is the case, for instance, when companies receive government funding to train less productive employees.
A second aspect refers to the range of support. Should this be granted to all the working poor or focused on specific target groups? Proposals for group-specific support naturally go beyond plans to top up labour income to a level guaranteeing minimum living standards. Besides more generous income support for a limited period – along the lines of income insurance – most models also provide for training. An illustration is the Trade Adjustment
Assistance programme established in the US. Taking its lead from this, the European Commission has set up a Globalisation Adjust- ment Fund. This is aimed specifically at workers or companies in sectors that have come under pressure from imports, whereby the competitive pressure can be measured by, say, the share of foreign intermediates relative to sectoral output (offshoring intensity). In
Group-specific support problematic
Germany there are specific combi-wages for older and younger workers which the mainstream parties wish to see expanded. However, such specific support has its problems. Target group- focused or sector-related (vertical) assistance may be more attractive as far as the public purse is concerned, because the costs can be kept better in check than with general (horizontal) programmes open to all the needy. But it has serious downsides. For one, vertical assistance naturally benefits the target groups one-sidedly – a state of affairs that is generally difficult to justify. Moreover, special programmes can fragment the benefits landscape, resulting in a lack of transparency and undesirable, unsystematic cumulative effects of general and specific support measures. The rules on supplementary earnings by recipients of unemployment benefit under the Hartz IV system in Germany serve as a cautionary example. Most importantly, with specific support government distorts competition. Companies or industries that employ workers receiving direct or indirect support are placed in a better position at the taxpayers’ expense and to the detriment of other companies and consumers in particular. The negative con- sequences are especially serious if the state specifically protects entire sectors with subsidies. This impedes structural change. Capital and labour are kept in less productive activities and competitive sectors have greater difficulty expanding.