Minijob-Reform: No Effect on Unemployment, Losses in Income Tax and Social Security Contributions

The so-called 'Minijob-reform', that was introduced in April 2003 as part of the 'Hartz II'-reform, was intended to increase work incentives for people with low wages and thereby reduce structural unemployment. Therefore, the hours restriction of 15 hours per week was abolished and the threshold up to which earnings remain free of social security contributions (SSC) was increased. We calculate the labor market effects and the effects on income tax and SSC on the basis of a micro simulation model. The analysis also includes indirect effects on total income tax and SSC resulting from the labor market effects of the reform. These effects consist of both, the effects from people not employed before the reform and the effects from people who were already working before the reform and whose labor supply reactions mostly remain disregarded in the political debate. The estimations show that the 'Minijob-reform' led to a small increase in the number of people in marginal employment. The effects on employment in secondary jobs and the potential legalization of illicit work are, however, not taken into account in this analysis. Persons who have already been working before the reform reduce their working hours. This leads to a small decrease in total working hours throughout the population.