German Chancellor Angela Merkel’s Cabinet approved a reduction in federal pension contributions as a way to cut business costs and lighten tax levels.

The contribution shared between employers and workers will fall to 19.6 percent from 19.9 percent from Jan. 1 of next year, the Economy Ministry in Berlin said in an e-mailed statement today. The cut is in line with the coalition’s objective of keeping non-wage labor costs below 40 percent of gross pay, the ministry said.

“The economic environment is becoming more difficult,” Economy Minister Philipp Roesler said in the statement. The reduction “increases the competitiveness of businesses and secures jobs in our country,” he said.

Merkel’s government agreed this month to cut income taxes by 6 billion euros ($8 billion) starting in 2013, resolving a dispute between coalition parties over tax relief versus budget consolidation.