German govt seeks compromise over welfare benefits

BERLIN (Reuters) - Chancellor Angela Merkel's government began searching for a compromise on Monday with opposition parties to lift benefits for 4.7 million jobless and under-employed after suffering a parliamentary defeat last week.

The upper house of parliament, representing the 16 federal states, blocked a law to raise spending by some 1.4 percent, or 5 euros a month more per recipient, that would have cost taxpayers some 480 million euros (407 million British pounds) per year.

For the first time since taking power last year, Merkel's coalition of Christian Democrats and Free Democrats that controls the lower house, or Bundestag, has been forced to make a deal with opposition parties to get a measure passed. The government parties lost a majority in the upper house in May.

A parliamentary mediation committee made of both Bundestag and Bundesrat members started working on Monday to hammer out a compromise amid opposition demands for significant improvements.

"My goal is to get the conditions in place before the end of the year so that we can wrap it all up in January," said Labour Minister Ursula von der Leyen. Her hope is that a deal will be reached in time for the next upper house meeting in January.

The issue surrounds a labour law introduced in 2006 to slash jobless benefits known in Germany as Hartz IV.

While investors mostly praise the partial liberalisation of the country's rigid labour market as key to its current economic success, Hartz IV badly hurt the centre-left Social Democrats.

The centre-right government is also trailing the opposition parties ahead of seven state elections in 2011 and it will likely be forced to make further compromises with the upper house, the states chamber.

(Reporting by Christiaan Hetzner; editing by Mark Heinrich)