Mixed reaction to minimum wage proposals

The Federal Council, the upper house of the German parliament, has approved a draft law on the introduction of a statutory national minimum wage. The proposal sets the minimum wage at €8.50 an hour. Despite still having to pass the lower house, the bill stirred a heated debate among employers and unions. A study by the Cologne Institute for Economic Research suggests the proposed minimum wage would contribute little to lowering the poverty risk among those it is designed to help.

Background

In a plenary session on 1 March 2013, the Federal Council of Germany, the Bundesrat, debated a draft law which proposes a national minimum wage (in German) of €8.50 per hour. The council wants the Federal Ministry of Labour and Social Affairs (BMAS) to set up a commission for introducing a statutory national minimum wage. However, the bill still needs to be debated by the Federal Government, and the Bundestag, the German parliament’s lower house. The bill’s progress in the Council reignited the debate among the social partners on the merits and shortcomings of a national minimum wage.

Social partners’ views

The Confederation of German Trade Unions (DGB) has been advocating a national minimum wage for many years. In 2007, the union confederation launched a campaign and a website to tell the public why a minimum wage was needed.

In its view, a statutory minimum wage of €8.50 throughout Germany is necessary to prevent employers paying irresponsibly low rates and to ensure that wage levels are high enough to secure a decent standard of living. The DGB argues that minimum wages affect not only people’s current income situation, but also their future pensions. It says higher wages mean higher contributions to the statutory pension system and subsequently better payouts.

Employers, however, fear that a statutory national minimum wage will cost jobs. In a statement at the end of February 2013, the Bavarian Business Association (vbw) spoke out against the bill. It stressed that a statutory minimum wage would diminish employment prospects for the low-qualified and the long-term unemployed who already find it difficult to participate in the labour market.

The Confederation of Employers Associations in the state of Baden-Württemberg (AGV-BW) criticised the Federal Council, arguing that wage levels must be based on the added value generated in the workplace. They said this held true even for simple tasks.

Dieter Hundt, Chair of AGV-BW, explained that 98% of the full-time employed already earned wages which gave them a decent standard of living. In his view, only higher levels of education and training could ultimately lead to higher wages.

Latest research

A recently published study by the Cologne Institute for Economic Research (IW Köln) sheds light on the numbers of employees likely to be affected by a minimum wage, their characteristics and their poverty risk.

The IW’s research shows that a minimum wage at the currently favoured rate of €8.50 per hour would affect 19% of all people in dependent employment in Germany. In absolute numbers, it would mean a pay rise for 6.1 million workers.

The results show that a minimum wage would be of greater importance for women. In 2011, 24.1% received an hourly payment lower than the proposed minimum, compared to 14.5% of dependently employed men.

The research shows 25.3% of part-time workers and 63.1% of the marginally employed would be affected by the proposed legislation. Only 12.6% of full-time employees would be affected.

Apart from gender and the type of working contract, regional disparities, age and sector also matter. Research shows:

  • the draft law now going through parliament would affect fewer people in western Germany (16.4%) than in eastern Germany (32.1%);
  • nearly half of employees younger than 25, and 44.3% of those aged 65 years or older earned less than €8.50 an hour in 2011;
  • nearly 44% of employees in agriculture, forestry and fisheries would be affected, 36.4% would be affected in the retail and the restaurant industries, 22.2% in transport and communications, and 18% in manufacturing;
  • only 7.3% and 5.7% in the banking/insurance and mining/energy sectors would be affected.

The researchers also probed deeper into the household incomes of potential beneficiaries. The study shows that low wage earners do not necessarily suffer from very low household incomes. On average, low wage earners living with a partner contribute less than 40% to the household income and often their earnings serve as additional income.

Finally, only 18% of those earning less than €8.50 per hour are threatened by poverty, defined as having a household income below 60% of the median income. This compares to a share of income poverty of 14% for the total population.

In the light of these findings, the researchers concluded that a statutory minimum wage could not be considered a useful tool for distribution policies and in particular for poverty reduction. An adverse impact on employment figures, on the other hand, could not be ruled out.

Sandra Vogel, Cologne Institute for Economic Research (IW Köln)

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