Many people demand that performance should be worth it (again), but only a few offer concrete solutions. FOCUS online spoke to three top economists. These are their suggestions.

It’s the slogan these days: “Performance must be worth it again.” Politicians and association heads repeat it like a mantra. For example, party leader Friedrich Merz called for an “agenda for the hard-working” at the CDU party conference. What is rarely addressed in these debates is the question of how performance can become worthwhile again.

In the same context, it is often said that citizens’ money, which is perceived as too generous, needs to be abolished. “Pure populism,” says Marcel Fratzscher, President of the German Institute for Economic Research, to FOCUS online, “because no minimum wage worker has even one euro more income if citizen’s allowance or benefits for refugees are cut.”

But what specifically needs to change to make performance worthwhile again? FOCUS online spoke to Fratzscher and two other renowned economists, chief economist Sebastian Dullien from the Institute for Macroeconomics and Business Cycle Research and Ulrich Kater, chief economist at Deka Bank.

Basically, explains Dullien, performance continues to be worthwhile in Germany: “Calculations have shown that for practically every household constellation it is better to work than not to work, and in the vast majority of constellations, increasing gross income also brings an increase in net income.”

There are exceptions, however, such as the tax burden on families bordering on the middle class. There, benefits such as housing benefit or child allowance melt away as income increases. In the end, there is little additional money left as income increases.

Fratzscher agrees here: “The problem is that for many people working part-time and with low wages it is hardly worth it to work more hours, as additional benefits – such as housing benefit or child allowance – are reduced so quickly that there is hardly any net left of the gross remains.”

Ulrich Kater, chief economist at Deka Bank, sees it similarly. “It is difficult for many employed people to deal with the fact that a job brings in so little income that the state still has to help out.” It is all the more important for their sense of justice that they then have noticeably more income than someone who relies entirely on the state.

“This also means that if you increase your own work effort, you can keep a sufficient amount of your earnings,” adds Kater – a point on which all three economists agree.

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However, Dullien also points out that “the correlation between performance and income is not always fair”. “The pay in many social professions, such as nursing, is not in proportion to the socially important performance, but is far too low, while top managers often earn incomes that can hardly be justified by their performance.”

The IMK economist therefore recommends “three necessary things” to make performance really worthwhile again. Firstly, Dullien advocates for an increase in collective bargaining, especially in such elementary professions as nursing. “Research shows that with more plan coverage, wages typically increase. In this way, performance would be better rewarded in these socially important areas.”

Secondly, there must be a reform to better support families at the bottom of the middle class so that social benefits decline more slowly as people earn more. “The Ifo Institute has presented calculations as to how something like this would be possible without a large financial investment,” explains Dullien.

Here too, DIW President Fratzscher and Deka chief economist Kater Dulliens share suggestions. “A policy priority should be to reduce taxes and indirect taxes, as well as not to reduce benefits as much as income increases.” The result: more employees would work more hours and be less dependent on the state. And it would bring workers to companies.

Kater adds: “There is still a need for action towards more work incentives, especially when it comes to additional income regulations.” Monetary motivation can also help in other areas, for example in tax structuring for married couples or for pensioners, says Kater.

As a final point, Dullien mentions higher taxes for those “whose income today is not in proportion to their performance.” “Since this is the case for many top managers, a moderate increase in the top tax rate for particularly high incomes would be appropriate.”

The experts also emphasize that companies also have to do their part to make performance worthwhile again. “An important step would be to conclude a collective agreement in those companies that do not have one today. In collective agreements, both collective bargaining parties usually ensure that services are paid appropriately,” explains IMK economist Dullien.

Companies could also reward performance more internally – “for example through rules for overtime pay and promotions”. Kater adds that it is “in the companies’ own interest” to pay fair wages, but also emphasizes the limits of competitiveness. “This also includes a sufficient level of profits, which is unpopular with many, as otherwise no more capital would be made available to the company.”

Higher wages, even higher taxes for top earners? That doesn’t necessarily correspond to what some politicians have in mind. But the alternatives that could make performance worthwhile again are rare.

An option that is rarely discussed would be a higher tax allowance. That would cost the state revenue. However, the lower income groups only contribute a few percent of payroll tax revenue anyway. Deka economist Kater thinks it makes sense to increase the basic allowance again.

Dullien and Fratzscher are more critical of this option. “If tariffs were otherwise unchanged, this would particularly benefit higher earners because they pay a higher marginal tax rate,” explains Dullien. Calculated in euros, these employees would benefit even more than low earners – although the latter in particular should be motivated to work more.

Dullien therefore continues to insist on a reform of the transfer systems so that transfer payments decline less quickly when income increases. “That would make the system fairer, increase work incentives at the same time, but not cost the community so much money,” says Dullien.

DIW President Fratzscher also says decisively: “An increase in the tax allowance is a bad, because it is not a targeted instrument to relieve the burden on low-income employees. The best instrument for higher incomes and better provision are higher wages and incomes.”

The economist explicitly refers to the minimum wage. This has proven itself since its introduction in 2015. A further increase would therefore make more sense here, as would “strengthening social partnerships to enable higher incomes and better working conditions”.

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