Social insurance exemptions and employment

A general social insurance exemption will have very little employment effect if the existing social insurance system and its regulations remain unchanged. This is the result of a new Ifo study that examines a proposal of the German Federation of Labour Unions, which calls for a monthly social insurance exemption of €250. Previous estimates of the employment effects are exaggerated. To be sure, the introduction of a general exemption will lead to an increase in the demand for simple activities. In particular side-line employment (part-time jobs) will be favoured, but less for unemployed persons than for those in the hidden labour force such as pensioners and unemployed spouses. Furthermore, part-time workers will have an incentive to extend their working hours while full time employees will limit their working hours. A basic problem of the general exemption model is that the social insurance system and its regulations would remain unchanged. Recipients of unemployment benefits II have little incentive to take on side-line employment because of the accompanying benefit reductions. Savings in social insurance benefits would be relatively small and would hardly offset the costs. Thus the value-added tax would have to be increased strongly. Adjustments to the existing social-insurance-contribution and tax structure would be considerable. From this standpoint the general exemption model loses its appeal.