German Labour Minister Ursula von der Leyen called the agreement a “difficult birth,” adding that she was relieved negotiations were finally over.
Welfare payments for some 4.7 million jobless and under-employed people will be raised by €5 to €364 a month, with the increases paid out retroactively from January 1 – the date by which the government had initially planned to implement the increase.
In early 2012, Hartz IV recipients will get another €3 increase, plus adjustments for inflation and wage growth, according to the deal. Meanwhile an educational programme for about 2.5 million needy children will be supplemented with an additional €400 million between 2011 and 2013 to provide more school social workers and warm lunches.
Other details include the creation of a minimum wage for temporary workers.
Members of the environmentalist Green party walked out of talks, declaring the plan was unconstitutional, but lead negotiator for the opposition centre-left Social Democrats, Manuela Schwesig, said she was happy with results.
The plan must now be reviewed by a conciliation committee before it can be passed by both the upper and lower houses of parliament.
The welfare reforms are required by a 2010 Constitutional Court ruling which found the payment system too confusing and ordered the government reforms by the end of 2010.
The basic payment was €359 per month, but critics said it should be increased to at least €420.
The government has estimated there are around 6.5 million recipients of Hartz IV, including 1.7 million children, the long-term unemployed, the handicapped and those too sick to work.
Hartz IV was named after Peter Hartz, the head of a commission that suggested changes to Germany's labour market and welfare system in 2002. It specifically refers to long-term unemployment benefits instituted in 2005, and has become synonymous with former Chancellor Gerhard Schröder's highly unpopular Agenda 2010 reforms.