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1 February 2023

The German transfer system for the working-age population: design, changes and consequences

A comparison of indicators of economic inequality between Germany and the UK reveals some stark and maybe also surprising patterns: according to the Luxembourg Income Study, Germany’s Gini coefficient stood at 0.26 and the poverty rate at 12% in 1996, compared to 0.33 and 21% in the UK. By 2016, both indicators had increased to 0.29 and 16% in Germany, while declining to 0.31 and 16% in the UK. At the same time, the rate of low-wage employment, as reported by the OECD, increased from 14% to 19% in Germany (compared to 21% and 19% in the UK). This pattern of convergence between both countries alone makes Germany an interesting case of comparison. This is all the more true, given that Germany also implemented some quite fundamental changes to its transfer system during this period. In this commentary, we want to highlight the role of social transfers in the wider context of national welfare states and social inequalities. We use the example of the German transfer system and its recent changes to assess consequences of benefit design for social inequalities in times of changing labour markets. We argue that while producing winners and losers, the reform’s immediate consequences for the generosity of transfers were modest, but did change some of the basic design principles of the transfer system. While it is still debated to what extent the reforms of the transfer system can explain the combination of decreasing unemployment and increasing labour market inequalities, they certainly modified the institutional context in a way that fundamentally altered the preconditions for the politics of combating inequality.

In their chapter, Hoynes, Joyce, and Waters (2023) offer a comprehensive analysis of the system of transfers in the UK and emphasise some important issues and characteristics. In our commentary, we complement this by briefly discussing the structure and changes of the transfer system in the German case. While we underscore some fundamental differences between both countries that will also eschew a direct transferability of insights, we believe that the experience in Germany is highly relevant to many of the themes in the chapter. In particular, given that strengthening social insurance is presented as one potential direction of change in the UK, Germany’s experiences with social insurance and the weakening of this principle in recent reforms are important.

In the following section, we start with some general thoughts on the set-up of transfer systems and their implications from a sociological perspective, drawing on a rich literature on welfare regimes and types of benefit systems. Against this background, we describe the German case and its structural problems, as well as the most important changes implemented with the so-called ‘Hartz-IV reforms’ in the early 2000s. We then discuss the evidence on the effects of the reforms. In line with the literature cited in the following section, we argue that these effects go beyond the impact on economic outcomes, and we also discuss the social and political impact of the changes. We conclude with a focus on what can potentially be learned from the German case for other contexts.

Cite this as:

Brülle, J. and Gangl, M. (2023), ‘The German transfer system for the working-age population: design, changes and consequences’,
IFS Deaton Review of Inequalities,