World Economy

German Minimum Wage, a Bone of Contention

German Minimum Wage, a Bone of ContentionGerman Minimum Wage, a Bone of Contention

A minimum wage of 8.50 euros ($10.50) will come into effect in Germany as of January 1, 2015. Proponents say it will boost the economy while critics claim it will destroy jobs. DW’s Nicole Goebel takes a closer look.

The tiny Duchy of Luxembourg was the first European country to introduce a minimum wage in 1944 – today it also offers the highest hourly rate in Europe of 11.10 euros. Of the 28 EU member states, 21 have set a minimum wage, others have traditionally relied on collective bargaining agreements to set wages, including Germany.

It worked well for decades, but now that Germany’s low-pay sector is growing and union membership is falling, many workers do not benefit from the collective bargaining system and are paid very low wages.

In western Germany, 14.6 percent of workers are paid less than 8.50 euros, in eastern Germany, 26.5 percent are paid less than the minimum wage that will come into force on January 1, 2015. In the US, which has had a minimum wage since 1937, only around 5 percent of all workers work full time at the minimum wage. The figure is roughly the same for the UK, which introduced the national minimum wage in 1999, partly due to a fall in wage bargaining power.

It will be mandatory for all workers aged 18 and over, with the exception of trainees. The long-term unemployed will not be paid the minimum wage within the first six months in a new job. A minimum wage commission is to review the rate in 2017.

According to a recent survey from the Munich-based Ifo economic institute, 26 percent of companies affected by the minimum wage plan to raise prices, and 22 percent are set to reduce staff. Eighteen percent plan to reduce working hours to offset higher labor costs. But 43 percent of firms do not plan any measures at all.

  Cheap Labor

Michael Burda, labor market expert at Humboldt University Berlin, points out that workers who are paid the minimum wage are often low-skilled and thus less productive in an economic sense. Thus, they can be replaced by machines more easily if they get too expensive.

“Investment has been low in Germany in the last 10 years, since the Hartz [labor market] reforms even though the economy is growing fast,” Burda told DW.

“One explanation is that labor is cheaper. When labor is cheap, you substitute into labor, so the negative side of having lots of jobs…is that you invest less and have less productive workers.” Burda says sectors like the fast food industry and other services will invest more in capital, meaning machines and equipment, at the expense of jobs.