Scope for cutting contribution rate to unemployment insurance scheme

Head office of the German Federal Employment Agency in Nuremberg ©Bundesagentur für Arbeit
Head office of the German Federal Employment Agency in Nuremberg

The current edition of the Bundesbank's Monthly Report explores whether there is any financial leeway for cutting the contribution rate to the unemployment insurance scheme in Germany. The Bank's economists back the idea of reviewing how the Federal Employment Agency's non-insurance-related benefits, such as rehabilitation measures, are financed. "As a general rule, non-insurance-related benefits allocated by general government should be financed using general tax revenue so that a burden is not placed on contribution payers alone," they write. This could open up potential for cutting the contribution rate by at least 0.3 percentage point. Writing in the April Monthly Report, they criticise the "relatively arbitrary" allocation of central government grants in the past, which "occasionally gave the impression that fiscal policymakers shift funding at a whim to suit the cash balance at any given time".

The Bundesbank's economists also cite the current upbeat state of the labour market as another point supporting their line of argument, writing that this backdrop made it seem wholly appropriate to initially continue building up reserves. However, if the situation in the labour market were to persist and the current low number of unemployment benefit recipients were to prove sustainable, they believe there would be financial leeway from this angle, too, for cutting the contribution rate. In the Bundesbank's view, this would be premised on strict budgetary discipline being maintained in terms of active labour market policy measures.

Justify insurance benefits

In order to be able to better distinguish between insurance-compliant and non-insurance-related benefits in future, the Bundesbank proposes drawing up a detailed list and introducing a duty for legislators to justify insurance benefits. At present, the Federal Employment Agency estimates that non-insurance-related benefits account for roughly 10% of its spending. The Bundesbank's economists go on to write that benefit rates that differ depending on whether or not the recipient is a parent are somewhat incompatible with the essence of unemployment insurance, adding that long-term claims of unemployment insurance benefit (I) by older recipients were more a separate government transfer than a regular component of an insurance scheme against the risk of unemployment.

European unemployment insurance scheme does not hold water

By contrast, the Bundesbank's economists take a critical view of proposals to shift some of the tasks of national unemployment insurance schemes to a European unemployment insurance scheme. The European Commission had floated a number of ideas on this topic.

The Bundesbank's economists take the view that if the objective were to balance out structural differences, this would be accompanied by sustained, longer-term transfers between countries. "This would appear, at best, worthy of consideration if labour market and economic policy were more centralised at the European level, as national economic policy decisions would otherwise have a strong financial impact on other member states," they write, adding that there was currently no majority to go down that path.

The Bundesbank's economists are equally sceptical about the idea of using balancing systems to stabilise economic growth across national borders, arguing that cyclical financing requirements at the national level pose no problem if public finances are sound as intended. Reserves could be depleted or borrowing raised and later replenished or repaid in better times. This option is also available under the European budgetary rules, which are linked to structural variables and allow countries to run up cyclical deficits. The Monthly Report comes to the following conclusion: "All in all, the proposals for a European unemployment insurance scheme appear to hold no water."