Reform of mini-job regulations as an economic engine: A new strategy for Germany's labor market

Proposal for optimizing the classic mini-job: What possible plans for “negative income tax” could mean for millions of Germans

The German labor market is facing structural challenges that require a fundamental rethinking of employment models. An innovative reform of the mini-job regulations, linking them to the citizen's income system and introducing progressive social security contributions, could play a key role in this. This reform could not only strengthen work incentives but also pave the way for a fairer and more efficient labor market policy.

Suitable for:

• Economic crisis? Also question and optimize the negative impact of mini-jobs on the German economy!

The challenges of the current system

The German social and employment system currently exhibits structural weaknesses that hinder both work incentives for low-earners and their integration into the regular labor market. Citizen's income recipients often face the problem that additional work hours are hardly worthwhile, as a large portion of the income earned is credited toward social benefits. At the same time, the strict mini-job limit of currently €556 creates an employment trap that prevents workers from extending their working hours.

The mini-job trap arises from the abrupt transitions between different forms of employment. While mini-jobbers can work largely exempt from social security contributions, significantly higher contributions are immediately due if they exceed the earnings limit. This means that both employees and employers have an interest in staying within the mini-job threshold rather than switching to full-time employment subject to social security contributions.

A new link: Citizen's allowance only with proof of mini-job

A key reform approach could be to link the receipt of citizen's allowance to marginal employment. This regulation would ensure that employable individuals must generally be employed to receive state support. Exceptions would only be possible in justified cases such as illness, childcare, or a lack of jobs.

This measure would have several positive effects. First, it would strengthen social acceptance of the welfare state by demonstrating that benefit recipients contribute to society. Second, it could serve as a springboard into the regular labor market, as mini-jobbers already have contact with employers and can prove themselves. Third, it would reduce undeclared work by creating legal employment opportunities.

Currently, recipients of citizen's allowance can earn up to €556 per month, with the first €100 exempt from tax. A reform could change this rule to make a mini-job a prerequisite for receiving citizen's allowance, while simultaneously improving the tax-crediting rules.

Negative income tax as a solution

A key element of the reform could be the introduction of a negative income tax system modeled on the American Earned Income Tax Credit (EITC). This system has proven to be one of the most successful social programs in the United States because it rewards work and creates ongoing incentives to work.

The negative income tax functions as an integrated tax and transfer system. Low-income people receive government subsidies that are only gradually reduced as their earned income increases. Unlike conventional welfare systems, where additional income is often fully credited toward social benefits, the negative income tax always maintains a financial incentive to work overtime.

In Germany, this system could be administered through the existing infrastructure of the tax offices. Calculations and payments could be handled by employers as part of payroll tax returns, thus avoiding any new bureaucracy. False statements would be prosecuted as tax offenses, reducing the risk of abuse.

Progressive social security contributions as key

A central component of the reform would be the introduction of progressive social security contributions, replacing the current hard threshold between mini-jobs and employment subject to social security contributions with a gradual transition. Instead of the abrupt cut-off at the €556 threshold, a continuously increasing contribution rate would be introduced, starting at zero and gradually rising to the standard rate.

The existing system of the transitional area (sliding zone) between €556.01 and €2,000 already demonstrates how such gradual transitions can work. In this area, employee social security contributions increase continuously, while employer contributions decrease accordingly. This principle could be extended to the entire low-wage sector.

A comprehensive reform could stipulate that social security contributions are levied starting with the first euro of earned income, but that these contributions would initially be very low and only gradually increase. This would eliminate the mini-job trap and create incentives for increasing hours without weakening the social security systems.

Dynamization and adjustment to the minimum wage

The reform should provide for an automatic adjustment of earnings limits to minimum wage increases, as already introduced in 2022. This dynamic adjustment prevents minimum wage increases from causing structural problems and ensures continuous adaptation of the regulations to economic developments.

The current mini-job threshold of €556 (2025) is based on a ten-hour working week at the minimum wage of €12.82. This automatic link ensures that minimum wage earners do not inadvertently fall out of the mini-job system and prevents regular political discussions about adjusting the thresholds.

Strengthening social security

An important aspect of the reform would be to strengthen social security for all forms of employment above a certain minimum level. While mini-jobbers are currently subject to only limited social security contributions, a reform could stipulate that all employees above a certain number of hours are included in the social security systems.

This would have several advantages. Social security systems would be strengthened, as more people would contribute. At the same time, workers would receive better social protection, particularly in the event of illness, unemployment, and old age. The 2019 reform of the transitional sector has already shown that such changes are possible without fundamentally compromising the attractiveness of marginal employment.

Our EU and Germany expertise in business development, sales and marketing - Image: Xpert.Digital

Industry focus: B2B, digitalization (from AI to XR), mechanical engineering, logistics, renewable energies and industry

More about it here:

• Xpert Business Hub

A topic hub with insights and expertise:

• Knowledge platform on the global and regional economy, innovation and industry-specific trends
• Collection of analyses, impulses and background information from our focus areas
• A place for expertise and information on current developments in business and technology
• Topic hub for companies that want to learn about markets, digitalization and industry innovations

Mini-jobs as a systematic springboard

A forward-looking reform should view mini-jobs not as a permanent solution, but as a systematic stepping stone to regular employment. This requires mandatory continuing education and training programs that can serve as incentives for companies.

Companies that transfer mini-jobbers into regular employment subject to social security contributions could receive tax incentives or direct subsidies. Such transfer bonuses would create a direct financial incentive to further develop mini-jobbers and open up prospects for them in the regular labor market.

Further training funding could be provided through the existing system of the Federal Employment Agency, which already offers various programs for in-service training. In particular, the newly introduced training allowance could be extended to mini-jobbers to enable systematic further training.

Tax incentives for employers

To increase the attractiveness of the reform for employers, various tax incentives could be introduced. Employers can already claim tax deductions for various benefits for their employees, such as health promotion payments of up to €600 annually or contributions to company pension plans.

These incentives could be expanded, especially for companies that actively contribute to the integration of citizen's allowance recipients. Tax benefits for continuing education, transfer bonuses, and other integration measures could increase the willingness of businesses to participate in the reform.

Integration of labor market policy measures

The reform should not be viewed in isolation, but as part of a comprehensive labor market policy strategy. Active labor market policy would need to be adapted to the new circumstances to better support low-income earners receiving benefits.

This is not just about finding work, but also about sustainable integration and development. Vocational training, extended working hours, and greater participation of second earners in households would represent additional tasks for labor market policy.

Coordination of various support instruments would be particularly important. Labor market policy measures, continuing education support, and the new incentive systems would need to be coordinated to achieve maximum impact.

Fiscal impact and financing

The proposed reforms would initially incur fiscal costs but could lead to savings in the medium term. Simulations show that reforms to the supplementary earnings rules could increase labor supply by 70,000 to 170,000 full-time equivalents, albeit at varying costs.

Social security system revenues would increase due to more contributors, while spending on citizen's income and other transfer payments could decrease. At the same time, tax revenues would increase due to more employed people. Careful modeling would be necessary to find the optimal balance between reform costs and economic benefits.

Challenges and implementation

Implementing such a comprehensive reform would pose significant political and administrative challenges. The various social benefit systems would need to be coordinated and existing regulations gradually adapted.

A careful transitional arrangement that does not disadvantage existing benefit recipients would be particularly important. The reform could initially apply to new entrants and then be gradually extended to all benefit recipients.

Technical implementation via the tax administration would require a modernization of IT systems, but could utilize existing infrastructure. Coordination between job centers, tax offices, and social insurance providers would need to be improved.

International experience as orientation

Experience with the American EITC shows that such systems can work. Three-quarters of the payments actually reach households in need, and the work incentives are demonstrably positive. Other OECD countries have also successfully implemented similar systems.

These international experiences could serve as a guide for German reform, taking into account the specific features of the German social and tax system.

Social acceptance and political feasibility

A successful reform would bring not only economic but also social benefits. Linking social benefits to work performance would strengthen social acceptance of the welfare state and counteract the accusation of a "social hammock."

At the same time, the reform would demonstrate that the state is both demanding and supportive. Those affected would not only receive support but also the opportunity for professional development and integration into the regular labor market.

The political feasibility of such a reform depends on the willingness to fundamentally rethink existing structures. Current discussions about the future of the citizen's income and the need for labor market reforms demonstrate that the need for political action is recognized.

A gradual implementation could reduce political resistance and simultaneously gather experience for further reform steps. Pilot projects in individual regions could demonstrate feasibility and generate political support.

The proposed reform of mini-job regulations could make an important contribution to modernizing the German labor market. By linking citizen's income to work performance, introducing progressive social security contributions, and systematically using mini-jobs as a springboard, a coherent system would be created that promotes both social justice and economic efficiency.

☑️ Our business language is English or German

☑️ NEW: Correspondence in your national language!

Konrad Wolfenstein

I would be happy to serve you and my team as a personal advisor.

You can contact me by filling out the contact form or simply call me on +49 89 89 674 804 (Munich) . My email address is: wolfenstein ∂ xpert.digital

I'm looking forward to our joint project.

☑️ SME support in strategy, consulting, planning and implementation

☑️ Creation or realignment of the digital strategy and digitalization

☑️ Expansion and optimization of international sales processes

☑️ Global & Digital B2B trading platforms

☑️ Pioneer Business Development / Marketing / PR / Trade Fairs

AI & XR 3D Rendering Machine: Fivefold expertise from Xpert.Digital in a comprehensive service package, R&D XR, PR & SEM - Image: Xpert.Digital

Xpert.Digital has in-depth knowledge of various industries. This allows us to develop tailor-made strategies that are tailored precisely to the requirements and challenges of your specific market segment. By continually analyzing market trends and following industry developments, we can act with foresight and offer innovative solutions. Through the combination of experience and knowledge, we generate added value and give our customers a decisive competitive advantage.

More about it here:

• Use the 5x expertise of Xpert.Digital in one package - starting at just €500/month