Almost alone among Europe's big economies, Germany has no minimum wage. Things are starting to change
WENDELIN WIEDEKING, Porsche's chief executive, earned an estimated €60m ($88m) this year. Hairdressers in some parts of Germany make less than €3 an hour. The gulf between them has been filled with a deafening outcry. Chancellor Angela Merkel, who is positioning her Christian Democratic Union (CDU) as the party of the political centre, has now joined in: her denunciation of the corporate “wage spiral” got the biggest applause during a speech to the party's convention in Hanover on December 3rd, held under the slogan of Die Mitte (The Centre).
But it is pay at the bottom end that politicians are seeking to change. On November 29th Ms Merkel surrendered to demands by the Social Democrats, the CDU's junior partner in the “grand coalition” government, for a minimum wage for postal workers. There is talk of extending that to ten other low-wage industries, including landscaping and meat-processing. Germany, one of the few rich countries without a minimum wage, may be undergoing a slow-motion revolution.
Liberal Britain and 19 other members of the European Union have economy-wide minimum wages. Most of the rest have collectively negotiated contracts broad enough to provide, de facto, a floor for salaries. Germany prides itself on letting unions and employers hammer out contracts without interference from the government. But such “wage autonomy” is under pressure. Industry-wide contracts cover fewer workers, real wages have slipped and fear of “wage dumping” by competitors from China and eastern Europe haunts German workers. The answer, say unions that represent low-paid service workers and their Social Democratic allies, is to impose minimum wages, ideally across the economy, with higher minimums for specific sectors such as postal services. The CDU, which hopes to re-elect three state governors next year, and Ms Merkel as chancellor in 2009, dares not resist too strenuously. It says yes to sector-specific floors, but no to a statutory minimum wage.
Many German economists find it scandalous that full-time workers can still be poor. Minimum wages, they argue, can save money on welfare spending. In their absence, recent pay awards have been lower in Germany than elsewhere, says Peter Bofinger, a member of the government's committee of economic wise men. The idea that Germany's labour markets are too rigid to cope with minimum wages is “nonsense”, he says, given that Germany is creating many temporary jobs.
To critics, however, minimum wages are a blunt tool for fighting poverty; they stifle competition and could destroy jobs. “A minimum wage, especially if it's too high, would be very damaging,” says Patrick Adenauer, who heads an association of family-run companies.
The early response to the postal minimum wage has increased such fears. The employers' association, dominated by Deutsche Post, a former state monopoly, in September signed a contract with ver.di, the main service-sector union, mandating wages of €9.80 an hour in western Germany and €9 in the east. The agreement extends to firms that plan to deliver letters when the postal service is opened to competition on January 1st.
But on December 3rd Dutch-owned TNT Post and Hermes of Hamburg froze plans to start a delivery service for private and small-business customers. Moreover, PIN, which belongs to the publisher Axel Springer, said it would dismiss 1,000 workers. Only the ex-monopolists at Deutsche Post can be pleased, which many suspect was the point of the wage agreement.
German unions are demanding a minimum wage of €7.50 an hour, about €1,250 per month. This is lower than in France but higher than in Austria (see chart). But, according to a study by two economists, Joachim Ragnitz and Marcel Thum, such a wage imposed across the economy would wipe out 1.1m low-wage jobs—3% of employment in western Germany and more than 6% in the east, where productivity is lower.
A minimum wage in the construction sector that has been in effect since 1997 has had little effect on employment in western Germany but has destroyed jobs in the east, according to a paper published by the research institute of the Federal Labour Agency. Along with easterners, it says, the young are especially vulnerable.
If reducing poverty is what the politicians are seeking, minimum wages are not the answer. Less than a fifth of workers with low wages live in poor households. The welfare system is supposed to provide every German who needs it with enough income to get by. Even though it might boost the incomes of some working poor, a minimum wage might also throw others out of jobs, making them poorer.
The move to minimum wages is part of a piecemeal retreat from the Agenda 2010 reforms which the Social Democrats enacted in 2003 and 2005, when they led the government and about which they have had misgivings ever since. The idea was to push unemployed people who had few skills into jobs by cutting the benefits available to the unemployed along with giving them an incentive to work.
“Dropping wages was part of the strategy to create more employment,” notes Holger Schäfer of the Cologne Institute for Economic Research. More than 1m Germans are reckoned to supplement their welfare benefits with (mostly) part-time jobs. Last month the number of unemployed Germans dropped to 3.4m, the lowest figure for 14 years.
Is that success now at risk? Not if a low minimum wage is set by experts rather than by politicians, perhaps with an even lower rate for young workers, as in Britain. The danger, though, is that Germany will instead succumb to pressure for ever-higher wage floors for individual sectors, leading to a workers' wage spiral that will be more damaging, if more popular, than the pay rises of fat cats. In their quest for votes, Germany's leaders are courting economic danger. It was ever thus.