Executive summary1

Unemployment is low but productivity growth has weakened

The economy has steadily recovered from the 2008 global crisis and, thanks to past reforms, the labour market has proved strong. Labour productivity growth has weakened and productivity is low in services. Germany has high material living standards, low income inequality and scores well in most dimensions of well-being. Despite substantial progress, there still are gaps in childcare and full-day schooling. Disincentives to work full-time in the tax system also contribute to low earnings of women as many work part-time. In recent years many low-income households have not benefited from economic growth and investment.

Demographic ageing and a large refugee inflow pose challenges

Labour supply is set to shrink faster than the population as a consequence of ageing. This can be offset by improving employment opportunities for women and older workers. Immigration, including the recent inflow of refugees, will also add to the labour force, but their integration requires additional efforts and spending which may exceed the currently available fiscal room. Some well-being outcomes decline with age, and therefore better prevention of health risks could raise income and well-being. Further reforms in the pension system are needed to ensure its long-term sustainability.

Investment is subdued and key social infrastructure needs to be developed further

Investment and productivity growth are held back by weak demand growth in emerging economies and also the euro area as well as restrictive regulation in services. Public investment has been low, although recently the government has provided more funds to improve maintenance of transport infrastructure. There is scope to improve efficiency in the procurement and management of public investment projects. Investment in formal childcare has increased. However, provision of childcare, early childhood education and full-day primary schooling still fall short of needs.

Main findings and key recommendations
Integrate refugees and migrants to limit fiscal costs and improve their productivity
The inflow of refugees is large. They lack German language and recognised professional skills.	Improve training and the recognition of immigrants’ skills.
Most asylum-seekers can only be hired within the first 15 months if a labour market test shows that no suitable EU national is available.	Ease labour market testing requirements for asylum seekers who are judged likely to stay and include them in active labour market programmes.
Strengthen investment and productivity
Regulation barriers, such as rules on exclusive activities, hamper competition in some services.	Reduce restrictive regulation in the professional services.
Regulatory biases and government ownership in business sector activities hold back the reallocation of resources, hampering investment in knowledge-based capital.	Improve governance or privatise government stakes in the Landesbanken, car manufacturing, telecommunications and postal services. The administration should strengthen the analysis of the economy-wide impact of regulation.
Government investment remains weak, especially in poor municipalities.	Provide more support for good municipal investment projects, including by strengthening administrative capacity, especially in municipalities burdened with high spending mandates (such as cash transfers). Strengthen investment in childcare, early childhood education and primary education.
Lower hours worked by women reduce well-being and economic activity. Income earned by secondary earners faces high taxation.	Lower the tax burden on the second earner in personal income taxation for example by introducing a separate tax-free allowance for second earners. Relate health insurance premiums to the number of adults in a household.
Exemptions from energy taxation and tax advantages for environmentally harmful activity weaken environmental policy.	Gradually adjust energy tax rates according to carbon intensity. Introduce taxation of NO_x emissions.
Address challenges posed by demographic change
Some aspects of the pension system penalise those who choose to work beyond 65 years of age or combine employment with the receipt of an old-age pension, holding back incomes and well-being.	Raise the pension premium for starting to draw old-age pensions later in life and do not reduce pensions for old-age pensioners who work.
The generosity of the public pensions is falling and coverage of private supplementary pensions is low, especially among low-income households.	Enroll all individuals in occupational pension schemes by default, allowing them to opt out.
Rising life expectancy will raise pension spending.	Index the pensionable age to increases in life expectancy.

← 1. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.