Q&A: The Minimum Wage – A Boon or Bane for the German Labour Market? "The Minimum Wage is no Replacement for Necessary Educational Policies"

While Germany did not introduce a statutory minimum wage across all industries until the beginning of 2015, the minimum wage was and remains a hotly disputed issue. With the minimum wage set to increase in January 2017, the debate has taken on a new dimension in light of the refugee crisis. The key question for many is: How does the minimum wage impact the German economy? In this Q&A session, ZEW labour market economist Terry Gregory explains that an excessively high minimum wage can be harmful to the economy. He argues that wage growth should be achieved first and foremost by a need-oriented education policy.

While critics abound, defenders of the minimum wage seem few and far between. Is the minimum wage accepted by the labour market as a fair lower bound on pay?

Studies show that the public acceptance is relatively high on the whole. The private sector predominantly accepts the minimum wage as well, as it tends to drive low-cost competitors out of the market. Whether or not this acceptance will persist in the long term will depend on whether the minimum wage improves the income situation for low-wage earners overall, or whether unexpected reactions are triggered in the private sector – e.g. job losses, increased working hours, the abolition of benefits, or similar adjustments. Furthermore, the bureaucratic burden associated with the minimum wage needs to be kept as low as possible, and the minimum wage level should reflect productivity.

A minimum wage increase from 8.50 euros to 8.80 euros is planned for the beginning of next year. Germany's unions, by contrast, are pressing for an increase to 9.00 euros. What impacts will this increase have?

Our experience with industry-specific minimum wages in Germany indicates that job losses are unlikely in the short term. However, if the minimum wage is set too high, this can lead to job losses and poorer working conditions, particularly in an economic downturn. The potential long-term effects of a minimum wage can be demonstrated by a ZEW study of the German roofing industry, where the minimum wage was increased to 12.05 euro since 1997. While the real pay of low-wage earners has improved, cost increases have led to job losses and wage restraints among skilled workers in East German roofing firms. Furthermore, many small businesses have been driven from the market. Against the background of technological change, wage hikes associated with the minimum wage may also lead to further investments in labour saving technologies and/or the outsourcing of work to cheaper companies abroad. A current ZEW study is investigating this very issue.

The minimum wage does not apply to adolescents without a vocational qualification, apprentices or to the long-term unemployed for the first six months in a new job. That is often viewed as discriminatory.

This rule was introduced because it would otherwise not make economic sense for firms to hire such workers, as wage costs would exceed productivity. Low productivity is related first and foremost to a lack of relevant skills and/or professional experience. The fundamental problem is that rising minimum wages lead to a gap between wage costs and productivity. Expanding the minimum wage exemptions to further groups of workers is no solution, as this would create a minimum wage that doesn't apply for many low wage earners. The focus should lie on a need-oriented education policy to encounter rising demands for qualification. For example, increasing automation is creating more demand for IT skills. The minimum wage is no replacement for necessary educational policies.

Let us remain on the topic of discrimination: In connection with the current wave of immigration to Germany, many have asked whether the minimum wage should apply to refugees.

The minimum wage was introduced to encounter the rapid growth of the low-wage sector. An exemption for refugees would undermine this goal by creating a new low-wage sector for refugees. Furthermore, firms might decide to give preferential treatment to the "cheaper" refugees, making it harder for Germans to find work. Regarding the integration of refugees into the labour market, a priority should anyhow be given to issuing work permits, officially recognizing qualification degrees obtained abroad, and to teaching of German language skills.