Berlin explores tax breaks to get Germans working longer hours

Germany is looking at tax breaks and welfare reforms to encourage people to work more, joining the UK and the Netherlands on a quest to tackle the region’s economic malaise by reversing a big drop in average working hours.

After months of debate, German Chancellor Olaf Scholz’s ruling coalition is preparing a “growth plan” to be unveiled as soon as next month that aims to make working longer hours more rewarding. Options under discussion include tax cuts on overtime and a benefits overhaul, according to people familiar with the plans.

The drop in working hours across Europe since the pandemic has exacerbated the region’s economic underperformance and poor competitiveness, attracting policymakers’ attention at a time when ageing populations are shrinking workforces.

Germany has the shortest average working hours of any advanced economy, according to the latest OECD data for 2022, reflecting a relatively high share of German women who are employed part-time and a growing preference for more leisure time.

Even if low-paid people in Germany want to work more, some have little incentive to do so because they lose much of the extra income in tax and reduced benefits.

“Everyone is only talking about the cyclical part of the problem in our economy, but even if we get back to 0.6 or 0.8 per cent annual growth we still won’t have fixed the structural problems. That is why we are tackling them,” Jörg Kukies, state secretary in the German chancellery, told the Financial Times.

According to the OECD, the average annual hours worked by Germans are down 30 per cent in the past 50 years, falling a quarter below US levels, reflecting Europeans’ growing preferences for longer periods of leave and more leisure time. 

“There are lots of disincentives for women to work longer hours in the German tax system,” said Enzo Weber, head of research at the Institute for Employment Research in Nuremberg, citing part-time roles that let people earn up to €538 tax-free a month and “tax-splitting” rules that allow married couples to be taxed jointly.

Christian Lindner, the German finance minister, has been pushing for tax relief on overtime beyond 41 hours a week as well as changes to the Bürgergeld system of unemployment benefits. But unions oppose these ideas, which are still being debated within the ruling three-party coalition.

“In Italy, France and elsewhere there is significantly more work done than here,” Lindner said at last month’s IMF/World Bank meetings in Washington. “When people work or work more, they end up paying higher taxes and social security contributions and receiving fewer social transfers.”

The energy crisis fuelled by Russia’s invasion of Ukraine caused the German economy to shrink 0.2 per cent last year. While Europe’s largest economy rebounded with growth of 0.2 per cent in the first quarter, it is expected to remain one of the world’s weakest major economies this year, with annual gross domestic product growth below 1 per cent.

“The federal government is currently working on a package to increase economic dynamism in Germany,” a spokesperson said.

The trend for many people in the EU to opt for shorter working hours has intensified since the pandemic. German train workers this year successfully pushed to reduce their working week from 38 to 35 hours by 2029.

The European Central Bank has estimated that at the end of last year Eurozone employees worked on average five hours less than they did before the pandemic hit in 2020 — equating this to the loss of 2mn full-time workers a year — while the average hours of US workers have remained stable.

Steven van Weyenberg, the Dutch finance minister, told the FT that governments had to “find new drivers of growth”. Such reforms could include making it more attractive for workers to spend longer hours in their jobs. 

“In the Netherlands there is quite a lot of part-time work; how can you make it more financially attractive to work more hours?” he said. 

The Dutch government has examined ways of reducing elements in its tax and benefits system that discourage people from adding to the number of hours they work, including by boosting childcare allowances for working parents, and improving parental leave. 

UK ministers also worry that a drop in average working hours has exacerbated labour shortages experienced since the pandemic. They have announced measures aimed at bringing more people into work and at prompting part-time employees to work longer — including new childcare subsidies and attempts to lessen perverse incentives in the benefits system that can deter people from taking on extra hours.

New UK regulations came into force this week that will put benefits claimants earning less than half a full-time minimum wage employee into an “intensive work search” regime. This means they have to meet work coaches regularly and prove they are doing all they can to earn more — or lose benefits.

Although charities worry that the changes will simply increase hardship for people unable to work longer, Rishi Sunak, prime minister, billed the change as “better for them and for economic growth”.

It is not clear how far recent falls in working hours are a result of changing lifestyle preferences, and how far they simply reflect a weak economy. 

ECB economists think a big factor explaining resilient job markets has been employers “hoarding” labour in a period of slack demand, to avoid staff shortages when the economy picks up. They also note that recent jobs growth has been strongest in the public sector, where hours are generally shorter.