Taxes & business banking for the self-employed


Self Employment and Freelance is slow but robust in Germany

Last updated on Nov 12, 2020

Kate Bailey

Freelance Editor

Nov 10, 2020

We have been on a history binge this month on the blog, so why not keep the fashion as we all focus our energy otherwise on moving through the pandemic and crisis! Many expats and Germans from outside Berlin come to the poorest and sexiest region of Germany and set up camp in the East of the city as a self-employed or freelance person. But do they know the history of the East? Thirty years ago it likely would never have been.

Within the socialist system of values ​​of the GDR society, professional independence and entrepreneurship were largely assessed negatively. Both were regarded as a rather undesirable remnant of capitalist society, which has no place in a workers 'and peasants' state. However, one has to distinguish between appearance and reality, between the pure socialist ideology and the concrete policy towards the private sector in the "real existing socialism" of the GDR.

After the founding of the GDR, the suppression of self-employment was initially driven particularly strongly in agriculture. This took place in the form of forced collectivization. In 1955, 71.6 percent of all people employed in agriculture were privately employed, while this proportion was only around 4 percent in 1960.

In the industrial sector, the socialist government initially took a more moderate approach. Nevertheless, many entrepreneurs left the GDR as early as the 1950s and 1960s, as their leeway was increasingly restricted over time. Plus, there have always been resourceful ways to finance a start up or freelance work in the capitalist side of Germany.

In 1972, private industry was finally expropriated. Since the great wave of expropriations at the beginning of the 1970s, self-employment has only been allowed in a few economic areas. There were only a significant number of self-employed people in the craft and retail sectors.

However, companies in these areas were also subject to strict controls by the state. For example, they were not allowed to employ more than ten people and the state tried to limit the profits of private companies. The production of goods took place increasingly in large state-owned enterprises. These so-called combines were obliged by a central planning committee controlled by the government to produce according to certain specifications.

In 1989 there were only 185,000 self-employed people in the GDR, which corresponds to a rate of around 1.8 percent of the working population (people between 15 and under 65 years of age).

In the course of German reunification in 1990, there was a fundamental transformation in East Germany from a centrally planned economy to a social market economy, as had already existed in West Germany for 40 years. This economic upheaval was associated with an enormous start-up boom. In 1990 alone, around 60,000 new companies were founded, around 60 percent of which were in the service and tourism sectors. 

The start-up boom in East Germany during the first years of the transformation process had a number of causes:

  • Firstly, due to the extensive suppression of self-employment under the GDR regime, there was a need to catch up on start-ups.
  • Second, immediately after the system upheaval, only relatively few eastern German providers faced a sharp rise in demand for production and service goods in eastern Germany.
  • Thirdly, unemployment rose sharply in East Germany, so that a lack of professional alternatives when deciding on self-employment was often a leading motive ("necessity entrepreneurship"). The number of employees in East Germany fell between 1989 and 1993 from 9.8 to 6.2 million. The average unemployment rate in 1993 was around 15 percent.

Information about the catching-up process with regard to self-employment is provided by the data material of the working group "Employment accounts of the federal and state governments", which uses various statistical sources to determine the number of employees and employees in various regions. The number of self-employed results from the difference between employed and employed persons.

In East Germany, the self-employment rate (proportion of self-employed people in relation to the total of employed and unemployed)  in 1991 averaged 4.2 percent and thus significantly below the corresponding value for the old federal states (7.3 percent). This is super interesting if you compare with the current data of today's reunified Germany. The number of self-employed people in Germany totaled over 4 million in 2016. Among them are 2.32 million solo self-employed , i.e. self-employed who run their business without employees.

Even more interesting is that despite efforts to bring in flashy startups and the spirit of entrepreneurship, Germany is still behind some European counterparts when it comes to self employment. It could be because the overall tax rate of 48% destroys the soul and feels like a punishment for success, that you have to use a fax machine to get a hole of the tax office or it could be that there was, of course, the issue of an ununified Germany.

Or because freelancers by and large are treated terribly by companies - many of whom claim to be on the freelancers side but ignore them, do not give them contracts (which is actually illegal under certain circumstances - very interesting topic to research!), do not pay them on time, ignore them about not paying them on time, and bold faced lie to them. But who's bitter?

Probably only freelancers who rely on people to do what they say to not have to make up for money they are owed by big giant companies! Probably just them though. So these could be reasons for slower growth. But let’s take a look where Germany stands now.

Germany is not exactly the country where companies are founded. According to a country comparison by the OECD, only eleven percent of the workforce in this country today are self-employed - the OECD average in 2014 was 15.4 percent. The leader in the ranking is Greece: A full 35.4 percent work here for their own account, as the Statista graphic shows.

On the Turkish job market, 34 percent are their own boss. There are very few self-employed people in Luxembourg: At just 6.2 percent, most of the employed work here as employees. The USA is only slightly higher with 6.5 percent. Barriers to founding a company are often bureaucratic hurdles, but also traditions and not least the labor market situation in the country.

In Germany in particular, studies show that many self-employed people start their own business out of necessity. This includes the migrant and asylum seeker population.

The other reason is that despite Germany being kind of capitalist, they do not subscribe to the Anglo and Yank concept of: "Higher, further, faster". This is the progress program of our time - and that of capitalism. We are consuming and producing more and more, faster and faster. For start-ups and entrepreneurs, the idea always resonates that they have to grow as quickly as possible and make high profits in order to keep up with the competition.

However, rapid growth does not always prove to be right. Because in the end it is not how fast a company grows that counts, but how we can see from the current situation that it can exist in the market for the long term.

In Germany, however, the goal is to slowly become self-employed. So what takes longer may in turn really be more robust. Many business advisors and banks agree that there is only one direction for young start-ups: upwards. A widespread image is that of steep ascent, which is rewarded with bright future prospects and the first million. The steeper and harder this is, the better future prospects are promised for founders.

The bad news is that most entrepreneurs lack essential ambitions and opportunities to start their business to transform within a very short time from a start-up into a huge corporation with sales in the millions. The good news, however, is that it doesn't have to be the goal either. Slow growth pays off and entrepreneurs are on the safe side - as opposed to dashing on the “start-up motorway”.

In Germany, there is no MOVE FAST AND BREAK THINGS type mantra and also no requirement to even want to be like that which, frankly, makes Germany very cool (especially by comparison to Zuckerberg which is not hard but is still a compliment).

OK! So that is our short and brief history of self-employment in Germany’s East and the status quo today. The history of Germany can often be surprising and so can the always slow and robust nature of the economy and approach to growth. We hope, especially if you are an expat freelancer, this fills in some of the gaps of the vastly different German freelancer and self-employed start-up scene.