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A high burden of taxation and an increasing number of recipients wholly or partly dependent on public transfers have brought the welfare system in Germany into question. Social benefits, including some paid by employers, amounted to a third of GDP in 1994. Since reunification, this share has increased by more than 31/2 percentage points. Nearly all programmes have expanded, unemployment benefits and old-age pensions in particular. In 1993, public social transfers to the new Under totalled 2.6% of GDP, nearly two-thirds of which were spent on labour-market measures such as unemployment benefits, early-retirement payments and work-creation projects. Such transfers have underpinned the rapid growth of wages at rates far above the growth of productivity.1
The federal nature of the constitution with its emphasis on `subsidiarity, has created a complex institutional structure, which also involves employers and employees. Following the principle that the local authorities are responsible for government functions that can best be executed locally, it is they who administer and finance social assistance. The principle of subsidiarity is in turn supported by sharing the revenues of certain taxes between different tiers of government, supplemented by a system of transfers between the territorial authorities that aims at securing a high degree of regional equality. Unemployment benefits are administered by the Federal Labour Office, which is supervised by employers and employees and by representatives of all three layers of government. Similarly, the public health funds and the pension funds are administered by employers and employees, the rationale being that social-security contributions are divided equally between them.
There are two types of unemployment compensation. both of which aim at securing a dignified standard of living for the unemployed and at facilitating the search for a suitable job: unemployment benefit, financed by the unemployment insurance system, and unemployment assistance, financed out of general tax revenues and available at a reduced rate after eligibility for unemployment benefit has been exhausted. In both schemes benefits are related to past earnings. Job-creation and retraining measures have a similar welfare effect. A major criticism of the system is that the unemployed have considerable scope to reject job offers without benefits being withdrawn - a degree of liberty which may discourage re-entry into employment, especially for unskilled industrial workers.
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