Will a minimum wage destroy German jobs?
Germany has once again become the worldâs favorite whipping boy, roundly criticized over the past few days by the U.S. Treasury, a top International Monetary Fund official and the European CommissionÂ president, among others, for running record trade and current account surpluses that are supposedly detrimental to the European and global economy.
The arguments continue, with the Germans themselves saying that the surpluses are simply the happy result of the nationâs industrial competitiveness and donât hurt anyone else. Lost in the debate, however, is whatâs happening in Berlin right now. As Chancellor Angela Merkel seeks to form a new coalition government, she appears to be on the verge of throwing out some of the very policies that underpin the export boom of the past decade.
Most controversially, the new government to be formed is likely to introduce a minimum wage, a novelty for Germany, and a move that both symbolically and in reality would herald the end of the tough wage restraint that has characterized the past decade. A range of social policy changes, including a possible reduction in the retirement age, are also being discussed, as is higher government spending.
Itâs not clear whether such shifts would provide the boost to domestic spending that the U.S. and Germanyâs other critics are demanding. But their very prospect is sending chills down the spines of German business leaders. Ulrich Grillo, president of the Federation of German Industries, warns that âGermany canât afford a grand coalition of election gifts,â and says that the politicians are acting as though Germanyâs continuing prosperity is a given, rather than something that needs to be worked at.
Deutsche Bank says flatly in a research report that the proposed minimum wage is âthe wrong policy choice.â
The shifts in economic policy are coming about as a result of political necessity. Merkel scored strongly in the September 22 parliamentary elections, but her Christian Democratic Union party didnât win enough votes to govern alone. The partyâs top officials have spent the past few weeks locked in negotiations with the opposition Social Democrats over the shape of a coalition government, and they have already given way on a number of points, including the introduction of a minimum wage of 8.5 euros per hour (about $11.50 at current exchange rates).
Germany is unusual in that it doesnât currently have a national minimum wage; pay scales for different industries are traditionally fixed by management and union organizations, in regular rounds of negotiations. Two elements of the planned minimum wage are notable. The first is the level being proposed, which is 45 percent above the U.S. minimum wage — considerably higher than that in some other European countries such as Spain, although below France and the Netherlands. The Hans BĂ¶ckler Stiftungâs Institute of Economic and Social Research has a handy guide to minimum wage rates around the world here.
The second notable element is its expected broad application, across the whole of Germany, East and West, and including new entrants to the job market. This amounts to a rollback of the stringent policies put in place by Merkelâs predecessor Gerhard SchrĂ¶der, starting in 2002, at a time when the German economy was struggling to digest the impact of reunification after the fall of the Berlin Wall.
SchrĂ¶der, a Social Democrat, worked together with the former head of human resources at Volkswagen, Peter Hartz, to devise policies that created jobs, in part through the introduction of low-paid âmini jobsâ that were exempt from social security charges. These were designed to getÂ hard-to-employ people Â back into the workforce. The result has been spectacular: Germanyâs current unemployment rate, of just over 5 percent, is half what it was a decade ago, and far below the 12.2 percent average jobless rate in the euro zone. And German productivity gains since then have far outstripped the modest rise in unit labor costs, propelling the current export boom.
Currently, about 12 percent of workers in Western Germany earn below 8.5 euros per hour, while in the eastern part, the figure is about one in four, according to research by the IWH institute in Halle.
Deutsche Bank is now predicting that the planned minimum wage would reverse some of the beneficial effect of the Hartz reforms and would likely increase labor costs generally, because the 8.5 euro level would be close to the median wage. The bank estimates that between 450,000 and one million jobs will be lost as a result.
In theory, the minimum wage would boost overall purchasing power, going some way to address the international criticism. But Hans-Werner Sinn, head of the IFO Institute for Economic ResearchÂ in Munich, argues that it would merely push up the price of German goods and make them less competitive, without leading to a significant increase in consumption of imports. âThere will be a bitter sobering up,â he warns.
For their part, advocates of the minimum wage argue that similarly dire gloom-and-doom scenario predicted in Britain back in 1998, when the government of Tony Blair introduced one, have failed to materialize. The British minimum wage is the equivalent of $10 per hour, below the planned German level. However, the British one is scaled so that apprentices and those under 21 receive substantially lower amounts.
The final package of policy measures to be adopted by the new German coalition is still under discussion. The Social Democrats are trying to reduce the statutory retirement age of 67 for some categories of workers, and there are ongoing talks about how to use a $40 billion surplus in the nationâs state-run retirement fund. The Social Democrats and some members of Merkelâs own party are arguing that it should be spent, while others say the compulsory levy on wages that is used to finance the fund should be reduced.
Merkel herself has said she wonât agree to policies that would jeopardize jobs. Still, whatever the eventual outcome, itâs already clear that Germany’s economic policy is in for some important changes. The U.S. Treasury and Germanyâs other detractors should take note.
PHOTO: Volkswagen CEO Martin Winterkorn, German Transport Minister Peter Ramsauer and Hesse’s Prime Minister Volker Bouffier (3rd-R) watch as German Chancellor Angela Merkel steps out of Volkswagen e-Golf car during the opening day of the Frankfurt Motor Show (IAA) in Frankfurt September 12, 2013. REUTERS/Kai Pfaffenbach