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WORKING IN GERMANY

Inflation wipes out high wage increases in Germany last year

Germany's Federal Employment Agency (BA) recorded a significant rise in wages last year - but not enough to compensate for high inflation.

Published: 25 July 2024 15:20 CEST
Euro notes and coins
Euro notes and coins. Photo: picture alliance/dpa | Monika Skolimowska

The median salary of all full-time employees subject to social security contributions in Germany was €3,796 per month in 2023.

Compared to 2022, wages and salaries have therefore risen by an average of €150 euros – or 4.1 percent.

According to BA, this rise can partly be explained by a spate of strike actions and collective bargaining last year. With the cost of living rising significantly, workers across several industries fought for high pay increases to compensate for inflation. 

However, despite some wins for Germany’s major unions, significant inequalities in earnings still remain, particularly when it comes to gender and location. 

While the median salary for men was just over €3,930 in 2023, women earned around €3,563 – a difference of €367. This was a slight increase compared to 2022, but shows an improvement compared to 2019, when the difference was €443.

READ ALSO: Five things to know about salaries in Germany

In terms of regional differences, the northern port city of Hamburg had the highest-earning residents while just down the coast in Mecklenburg Western-Pomerania, people earned the lowest. 

The highest median salaries were achieved by full-time employees in Hamburg at €4,304, followed by well-heeled Baden-Württemberg at €4,134 and Hesse at €4,087.

On the other end of the spectrum, three former East German states had the lowest-paid employees. In Mecklenburg-Western Pomerania, the median salary was €3,098, in Thuringia it was €3,109 and Saxony-Anhalt it was €3,152.

How much employees earned also depended heavily on their qualifications.

While people without a vocational qualification earned €2,831 on average, employees with a recognised vocational qualifications earned €3,658. Graduates were among the highest earners, taking home a median salary of €5,688 per month.

READ ALSO: The best-paid jobs you can get without a university degree in Germany

Pay also tends to increase as employees get older, BA reported.

Employees under 25 earned €2,897 on average, while 25 to 54-year-olds earned €3,860. Median salaries for employees over the age of 55, meanwhile, stood at €3,954 per month.

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TAXES

German cabinet ministers approve sweeping tax reform plans

The German cabinet has passed a series of significant income tax relief measures and tax class reforms, particularly affecting married couples and civil partners.

Published: 24 July 2024 16:13 CEST
German cabinet ministers approve sweeping tax reform plans

The changes are part of Finance Minister Christian Lindner’s (FDP) second annual tax law, a wide-ranging package of tax reforms that will now move to the Bundestag for approval.

The reforms are intended to adapt Germany’s tax system to the current high cost of living and address some inequalities in how couples are taxed. 

“It is simply a matter of fairness to adjust the tax system to inflation,” Lindner said at a press conference when introducing the proposals in June. “The state must not be the winner when there’s high inflation.” 

One of the cornerstones of the reform is the increase in the tax-free allowance – the amount employees can earn without being subject to taxation. 

This amount will increase by €180 to €11,784 this year and rise incrementally to hit €12,336 by 2026.  

The child tax-free allowance will also see gradual increases over this period, starting with €228 extra this year and rising to €6,828 by 2026, while the child benefit (Kindergeld) will also go up by €5 per month from 2025. 

READ ALSO: How Germany’s planned tax shake-up could affect you

Lindner has also set out plans to combat ‘cold progression’: a phenomenon whereby an increase in earnings is eaten up by inflation but taxed at a higher rate regardless. This means the income threshold for each tax bracket will be pushed upwards next year, with the exception of the highest tax rate. 

The top tax rate of 45 percent will still apply to incomes above €227,826, but the thresholds for the solidarity surcharge will be raised.

German Finance Minister Christian Lindner arrives for the weekly cabinet meeting at the Chancellery in Berlin

German Finance Minister Christian Lindner arrives for the weekly cabinet meeting at the Chancellery in Berlin on May 15th, 2024. Photo: Tobias Schwarz / AFP

Though Lindner managed to pass his reforms in cabinet on Wednesday, his centre-left coalition partners from the Social Democrats (SPD) and Greens have previously aired their scepticism about the reforms.

“You can’t demand drastic savings from other departments…and then demand tens of billions yourself without need,” Green Party finance expert Katharina Beck recently told Reuters, referring to recent budget cuts for departments like defence and infrastructure.

Describing the plans as “dubious”, Beck argued that they would primarily benefit the well-off. 

Changes for couples

A cornerstone of the reforms includes removing a loophole often used by couples with differing incomes to reduce their taxes. 

The current tax classes 3 and 5, which come with higher tax-free allowances and higher deductions respectively, are set to be abolished by 2030. Instead, couples will automatically be placed in tax class 4.

This change aims to distribute the tax burden more equitably between partners, reducing the need for end-of-year tax payments and addressing the perception that lower-earning partners’ work is undervalued.

However, the reform stops short of scrapping the marriage splitting system – known as Ehegattensplitting in Germany – which benefits couples with disparate incomes by combining their earnings for tax purposes.

READ ALSO: Ehegattensplitting – How did Germany’s marriage tax law become so controversial?

While many in the traffic-light coalition have spoken out against Ehegattensplitting, the FDP opposes its abolition, equating it with a significant tax increase for couples.

However, critics say the shared taxation helps perpetuate income disparity and part-time work among women.

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