Is the German Minimum Wage a Boon or Bane? Too Soon to Tell

With a minimum wage in effect for Germany since the beginning of the year, it's time to take preliminary stock of its impact. Has the statutory minimum wage led to job cuts, as many critics feared? At first glance, the picture looks positively rosy. The job market is booming, and in April the number of unemployed sunk to 2.84 million. Germany's Minister of Labour, Andrea Nahles, publically declared the naysayers mistaken. A closer look at the situation, however, reveals that the minister may have spoken too soon.

Germany's flourishing job market is part of an upward trend in employment that began years ago and owes its existence mostly to clever collective bargaining policies that have kept wage increases moderate. In addition, the job market has recently benefited from the falling euro exchange rate, the collapse in oil prices, and low interest rates. That legislators introduced the minimum wage in an extremely favourable economic climate explains why employment appears to come away almost unscathed. But it’s simply not true that there have been no signs of job cuts.

The area of marginal employment, for instance, seems to be on a downward slide. In February the number of marginally employed individuals – people for whom a 400-euro "mini-job" is the only, not an additional, source of income - was 2.8 per cent less than the year before. This translates into 136,000 fewer mini-jobs. Of course it is possible that employers converted some of those mini-jobs into real positions paying into social security insurance. But many retirees and students who rely on mini-jobs are likely among the first who have been hurt in the process.

Opponents of the minimum wage from the business sector have mainly criticised the additional bureaucracy it creates, specifically paperwork for hours worked and liability for subcontractors. It is fairly obvious that if the minimum wage is to work, companies must record employee hours. But I am not convinced that companies must necessarily be held liable when their subcontractors fail to pay the minimum wage. The statutory minimum also brings with it structural problems. To save money companies will try to increase the number of unpaid overtime hours, or force former low-wage employees into self-employment. In turn, politicians will seek to prevent such attempts to skirt regulations, leading to more bureaucracy. But the greatest risk lies neither in short-time employment effects nor in growing monitoring, but in long-term shifts on the job market.

A minimum wage adversely affects the creation of new jobs for the most vulnerable demographics, youth and unskilled workers, in particular. Consider France, where the minimum wage, currently EUR 9.61 an hour, has been a key reason for large unemployment among young adults. Policy-makers have been trying for years to fight unemployment by taking out less for social security with low-wage jobs, costing France around 20 billion euros a year. In the future these government subsidies are projected to increase. If things don’t go well, something similar may happen in Germany.

It will take several years before the job market boom runs its course and the erosion of the low-wage sector has advanced to the point that the government must take action - in all likelihood with subsidies. At the end of the day, this will cost state coffers more than supplementing low wages. If future adjustments are moderate, the damage will be limited. If, by contrast, future elections are decided by which candidate campaigns on a higher minimum wage, the "German Wunder" on the labour market could become a thing of the past.