Will a minimum wage destroy German jobs?

By Peter Gumbel
November 7, 2013

Germany has once again become the world’s favorite whipping boy, roundly criticized over the past few days by the U.S. Treasury, a top International Monetary Fund official and the European Commission 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 nation’s industrial competitiveness and don’t hurt anyone else. Lost in the debate, however, is what’s 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.

It’s not clear whether such shifts would provide the boost to domestic spending that the U.S. and Germany’s 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 “Germany can’t afford a grand coalition of election gifts,” and says that the politicians are acting as though Germany’s 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 “the wrong policy choice.”

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 didn’t win enough votes to govern alone. The party’s 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 doesn’t 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 Böckler Stiftung’s 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 Merkel’s predecessor Gerhard Schröder, 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.

Schröder, 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 “mini jobs” that were exempt from social security charges. These were designed to get hard-to-employ people  back into the workforce. The result has been spectacular: Germany’s 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 Research 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. “There will be a bitter sobering up,” 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 nation’s state-run retirement fund. The Social Democrats and some members of Merkel’s 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 won’t agree to policies that would jeopardize jobs. Still, whatever the eventual outcome, it’s already clear that Germany’s economic policy is in for some important changes. The U.S. Treasury and Germany’s 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

3 comments

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This is sheer madness. There is no question that a minimum wage makes all those whose labor productivity is insufficient to justify paying that wage unemployable. It creates an army of people who will forever become dependents of the State. There can be no question about it, economic theory is clear on this. It cannot be ‘disproved’ with statistics (the attempt to do so is akin to trying to disprove the existence of gravity with statistics). It is in fact a cynical move that significantly undermines individual freedom. People who want to work for less than the minimum wage won’t be able to sell their labor on the market anymore.

Posted by PaterTenebrarum | Report as abusive

Then let these jobs get lost. You have to remember these jobs are done by uneducated people or in the German case they only have a highschool degree which is worthless. With a highschool degree you will never realy make more there. And even if these jobs get lost everyone is free to sponsort reschooling to apply for jobs that are then open. You have to remember they use dual education system. Once out of highschool you apply for company jobs which then educate you in said job for the next 3 years in mix of 3 days in the company 2 days at school. You receve in that moment a low pay as compensation from said company and if you have own place other part will get brought up by taxes so you can life. Once you done and passed the final test (govenment country wide same standards you finaly officially a “Facharbeiter”) and you get always decend pay. If not scandivia to all neighbouring countrys down parts of afrika you can expect double the pay what a local citizen would recieve since these people know what they do. Or in american terms compare just the value of highschool degree’s. The german highschool degree is rated in the usa as low technical college degree and you can already in the states do decend jobs because there is no standard. Once you “Facharbeiter” you can hop from company to company and there is no training time since they know what you capable of and the routines of everything is same. But yeah back to the point you just reschool and do something else its free and even offered by the jobcenter since the jobs that pay so low are not worth doing in first place. And the once willing to work for these are amounts are often foreigers or east europeans since for them its a lot of money, but overall you need your 12-18$ hour to make it worse lifing otherwise these people work for lets say 8euro or what is it 10$ and you get still another 400-500$ monthly from govenment with other benefits (higher of course the more people life in household that would be for single household, each child you can add quick 600-700$ on top every month and if you have spouse then another 500$)by far more and extensive then a standard us citizens enjoys with middle class standard. So in the end these poeple recieve that money anyway why make let companys profit from it to offer so low pay…

Posted by Capataz | Report as abusive

no it won’t.

Posted by satori23 | Report as abusive

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