Miracle Cures

Proponents of the introduction of a broad-based minimum wage in Germany have slowly begun to view minimum wage law as a miracle cure-all, a veritable wonder drug for all ailments suffered by the body of the state. Yet as with all drugs, patients are advised to inquire as to risks and possible side effects.

Many argue that the introduction of a minimum wage would solve the problems associated with determining the benefit amount that should be granted to the long-term unemployed. Some months ago, Germany’s Federal Constitutional Court ruled that long-term unemployment benefits are not calculated in a manner consistent with the constitutional requirement that all citizens be provided "a subsistence minimum in line with human dignity". Since this decision was handed down, various parties have made propositions concerning how benefit amounts should be determined, and each proposal has been more generous than the last. But the Federal Constitutional Court has rejected only some benefit calculation methods as excessively open to interpretation. At the same time, the court has said that the current benefit amount is not "evidently insufficient", but merely calculated in an incorrect manner. Nevertheless, many have appealed to the court’s decision in order to justify calls for an increase in the standard monthly benefit amount from 359 euros to 400 or even 500 euros. But regardless of the benefit amount decided upon, any increase would run afoul of the principle that proceeds from paid work should be significantly higher than the welfare benefits granted by the state. As it stands, there is already too little incentive in Germany for benefit recipients to enter the labour force.

At first glance, a minimum wage would appear to resolve this problem beautifully. Low-wage workers would be paid more, and the long-term unemployed could receive higher benefits, without violating the principle that wages should exceed benefits. A veritable miracle cure!

The proponents of a statutory minimum wage additionally contend that it would ease the downward pressure on wages that is expected to result when workers in numerous Central and Eastern European EU countries are granted full freedom of movement next year. Dramatic scenarios have already been making the rounds in which wages are pushed to intolerably low levels in Germany’s labour market due to a flood of Eastern European immigrants. Regardless of the fact that in all likelihood, far fewer workers will immigrate to Germany than is feared, if one accepts the logic advanced by the proponents of minimum wage law, then workers in branches that are not particularly impacted by immigration should also be entitled to protective measures – in this case, against international competitive pressures. For ultimately it makes no difference whether a specific good or service is offered at a lower price in Germany because it was produced by Eastern Europeans working for low wages in Germany, or whether the good or service was produced in Eastern Europe at comparatively low wage costs and then imported.

Yet a third beneficial effect is ascribed to the minimum wage by its proponents: it is widely believed that a minimum wage would help to close the growing gap between the lower and middle class. In this connection, the effort to introduce a minimum wage is regarded as a righteous cause. One should be able to earn a decent living from the work one performs, it is argued. Who, then, would be so heartless as to deny this?

Before a medication is approved for the market, pharmaceutical companies must perform clinical trials to verify it is safe and effective. In the field of economics, one draws upon econometric studies of policy measures as well as real-world experience. Research and history show that the minimum wage is a medication with harmful effects. In the very best case, the minimum wage functions as a placebo – that is, when it is set lower than market wages, and therefore has no real impact aside from an imagined one. Only in exceptional circumstances does the minimum wage produce positive effects. Normally, however, it leads to the loss of thousands of jobs in the low-skill sector, thus harming precisely those workers it is ostensibly designed to assist. This is confirmed not only by numerous studies, but also by past experience in France, where the increase in the minimum wage a few years ago lead to a rise in unemployment among low-skilled youths.

Thus, although the minimum wage might appear at first to be a miracle cure, it is a treatment with extremely damaging side effects, and it should not be approved for the market.