ifo Institute Wants to Expand Incentives for German Women to Work

The ifo Institute has advocated expanding the participation of women in the German labor force, describing this as a necessary step to stabilize the social security systems when the baby boomers retire. This is what Helmut Rainer, Director of the ifo Center for Labor and Demographic Economics, and Andreas Peichl, Director of the ifo Center for Macroeconomics and Surveys, write in ifo Schnelldienst. “Policymakers should promote women’s and mothers’ employment through better childcare options and by restructuring the system of tax splitting for married couples. This could increase financial flexibility and ensure greater equality and participation in the labor market,” the authors write.

To reduce disincentives to work for married second earners, the authors argue for a capped real splitting instead of the marital splitting. This would amount to individual taxation with a deduction for alimony. The closer the alimony deduction is adjusted to the basic allowance for adults, the greater the employment effects would be. For this reason, the authors recommend raising the basic exemption at the same time.

The current situation leads to distortions: for example, if a woman with an average gross hourly wage who is married to a man who works full-time switches from being inactive to working part-time for 25 hours a week, her marginal tax rate in Germany is about 50 percent. In Sweden or the US, newly earned income is subject to a much lower tax burden, with a marginal tax rate of less than 30 percent. In this way, the German marital splitting system favors the traditional household model, with one partner employed and the other taking over domestic work in the home. This runs counter to political goals such as gender equality and improved work-life balance. The interplay with regulations on marginal employment and on the non-contributory co-insurance of spouses in the statutory health insurance system reinforces the effects of marital splitting on the division of labor between married women and men.

According to the article, almost half of all women in Germany work part-time. On average, women are employed for 30.5 hours per week, or about four hours less than women in Sweden or France, for example. The transition to parenthood in particular plays a decisive role in this: in Germany, women disproportionately restrict their scope of gainful employment after the birth of a child.

Despite all the improvements in recent years, childcare still has glaring weaknesses in terms of quantity and quality. The childcare needs of parents with children under the age of three have not been met for a long time, especially in western Germany: 46.6 percent of parents had requested a childcare spot for their child in 2019, but the childcare rate was only 30.3 percent. This makes it imperative to press on with expanding institutional daycare. Childcare services ought to be flexible in terms of time and location to meet the needs of parents and their children. A political offensive is also needed to recruit teaching specialists at daycare centers.