"Dignity has its worth. Work has its price" Minimum wage campaign slogan on Ver.di union building
Germany’s minimum wage: Vorsprung durch Mindestlohn?
As the UK minimum wage clocks up its 15th anniversary, a long campaign by German trade unions is finally coming to fruition. The German government has just announced details of a law that will, for the first time in German history, provide for a general statutory minimum wage. This had been agreed in principle in the coalition agreement signed by the (social-democratic) SPD and (conservative) CDU/CSU in December of last year. It is one of the cornerstones of that agreement and, almost certainly, the key reason why SPD members voted by more than 3-to-1 to enter an unpopular Grand Coalition with the conservatives.
From 2015 on all workers in Germany will have to be paid at least €8.50 (currently £7.11) an hour, unless a binding sectoral level collective agreement provides for a lower rate. This exemption expires after two years. A commission will regularly review the level of the minimum wage. The first possible increase is foreseen for 2018. Unlike in the UK, though, the Commission will consist of three representatives each from the union and employer sides, plus just two academic representatives, again nominated by the two sides of industry.
The debate since the coalition agreement was reached has centred around possible exemptions from the law. Employers and conservatives have called for substantial segments of the workforce to be excluded from coverage. However, according to an announcement on 19 March by Labour Minister Andrea Nahles, only those under 18, volunteers and those entering work from long-term unemployment will not be covered. The exclusion of youngsters and the delay before the first possible increase have been criticised by the DGB, the German TUC.
How important is the introduction of the minimum wage? Very. In both procedural-political and in substantive-economic terms.
German industrial relations has long adhered to a principle of Tarifautonomie, akin to free collective bargaining, in which state involvement in wage setting was widely rejected. This consensus gradually eroded, however, in a series of developments that was in many respects foreshadowed by those in the UK in the 1980s and 1990s. Unionisation rates and the coverage of collective agreements declined, opening up entire sectors to cut-throat competition on wages.
Under the pressure of high unemployment, wage inequality rose dramatically. Service sector unions began to argue for state involvement, a change initially rejected by the large industrial unions. Gradually, though, they swung round behind the demand for a statutory minimum wage. Surveys increasingly showed that voters were in favour. Conservatives and liberals reluctantly came round: partly for electoral reasons, partly in view of the increasing evidence that the German state was losing billions in subsidising employers by topping up the pitifully low wages of workers in order to bring earnings up to subsistence level.
Estimates vary somewhat, but around 5 million German workers are currently paid less than €8.50 an hour. Appallingly in such a wealthy country, more than 1 million earn less than €5 an hour. That’s gross. Ensuring that these workers get a decent wage will make a big difference to their living standards and those of their families. And of course there will be some upward pressure on the wages of workers currently earning just above the new statutory minimum.
Will this lead to inflation and unemployment? There is no reason to believe so. The UK experience in the late 1990s is often quoted in the German debate in support of the idea that negative effects are unlikely. Moreover, Germany is a special case. Inflation has been extremely low in recent years and, linked to that, it has been posting massive trade surpluses. This (and the accompanying deficits in crisis countries) has been one of the factors causing so many problems within the euro area. Faster wages increase in Germany are just what the doctor would order as a way to help the euro area as a whole move forward to better economic times.