Activating social welfare 2006 - the combi-wage model of the Ifo Institute

On 26 January 2006 at a Bundespressekonferenz in Berlin, the Ifo Institute presented an updated version of its combi-wage model - activating social welfare - as an alternative to the present wage replacement system. The Ifo model could create jobs for up to 3.2 million low skilled workers at lower expense to the state. The present social welfare system, currently known as Arbeitslosengeld II, creates a permanent barrier for more employment among the low skilled. The reason is the relatively high benefits to persons fit for work who remain unemployed, and the high transfer withdrawal rate that punishes those who take on a normal job. The Ifo model offers a feasible and financeable way to eliminate this obstacle through a restructuring of governmental wage replacement benefits by combi-wages. It would end the present competition between the welfare state and private employers and introduce a socially acceptable adjustment of the German wage structure to international wage competition, especially for the less qualified.