German Wage Accord Seen Risking Job Cuts That Foil Aims

Photographer: Krisztian Bocsi/Bloomberg

While the analysis echoes universal concerns when increases at the bottom of the wage scale are at issue, economists say the key is in the balance. Close

While the analysis echoes universal concerns when increases at the bottom of the wage... Read More

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Photographer: Krisztian Bocsi/Bloomberg

While the analysis echoes universal concerns when increases at the bottom of the wage scale are at issue, economists say the key is in the balance.

Germany’s nationwide minimum wage to be introduced by Chancellor Angela Merkel’s third-term coalition risks killing jobs while failing to narrow income inequality, German economists say.

The 8.50 euro ($11.55) per hour wage floor set in her governing pact with the Social Democrats “would not even out inequalities in the disposable incomes of private households or significantly reduce poverty,” according to the Berlin-based DIW economic institute. A potential increase in unemployment will depend on exceptions to the general rule, it said.

While the analysis echoes universal concerns when increases at the bottom of the wage scale are at issue, economists say the key is in the balance. A 2012 joint report by the International Labor Organization, the Organization for Economic Cooperation and Development, the International Monetary Fund and the World Bank said setting minimum pay at 30 percent to 40 percent of median wages sustains consumer spending, reduces poverty and shrinks income inequalities.

In Germany, 8.50 euros amounts to 58 percent of the median wage, Deutsche Bank AG said in a note published Nov. 1. The report, written by the bank’s Frankfurt-based chief German economist Stefan Schneider, said that would rank third among 19 European Union countries, after France and Slovenia. The measure for the U.K., which introduced a minimum wage in 1999, is 47 percent.

‘Small’ Effects

Germany’s largest bank predicted that between 450,000 and 1 million jobs would be lost as the new rule raises wages of around 6 million workers, representing 17 percent of the working population. German disposable income may even shrink as job losses outweigh wage increases, it said.

The introduction of minimum wages has led to contradictory results globally, “with some authors finding negative, but generally small, employment effects and others finding either statistically insignificant or small positive effects,” the OECD said in a 1998 report.

An analysis covering the period 1975 to 1996 for nine countries -- Belgium, Canada, France, Greece, Japan, the Netherlands, Portugal, Spain and the U.S. -- showed that minimum wage increases had a negative impact on jobs for teenagers, the least qualified in the labor force, the OECD report said.

Living Standards

“It improves the living standards of people who are working, working hard in many cases, and it doesn’t seem to harm their job prospects,” Alan Manning, professor of economics at the London School of Economics, said in a Dec. 3 interview. “When it was first being proposed in the U.K. there were people arguing this was going to destroy hundreds of thousands of jobs -- sometimes it went into the millions -- and that just very obviously didn’t happen.”

A German minimum wage of 8.50 euros in 2013 “would be toward the upper end” in international comparisons, Manning said. By the time it’s introduced in 2015, “it won’t be quite as high as it seems now,” he said.

Germany, with the euro region’s second-lowest unemployment rate of 5.2 percent, according to OECD data, is confronting international pressure to promote domestic demand and shrink its 7 percent current-account surplus as a way to spur exports by other euro countries.

Christine Lagarde, managing director of the IMF, said in a March 8 speech in Dublin that it’s “an aspect of pan-European solidarity” to allow wages to rise faster “in countries that can afford it.”

Incomes Diverge

The domestic campaign to boost wages stemmed from concerns that the highest earners are outpacing the rest. While the richest 10 percent enjoyed a 13 percent increase in incomes between 2000 and 2011, the poorest 40 percent suffered income losses as high as 5 percent, partially due to an expanding low-wage sector, the DIW institute said in a Nov. 13 report.

“They’ve got to strike a balance between imposing a minimum wage but not imposing one that’s too high, where its unit labor costs are going to rise too quickly and erode some of its competitive advantage,” Jonathan Thomas, a senior economist at Lloyds Banking Group Plc in London, said in a telephone interview. “That might be good for the rest of Europe, but I don’t think that’s going to be good for Germany.” Thomas was the lead economist at the U.K. government’s former Department of Trade and Industry that did the background analysis for the implementation of the minimum wage there.

Coalition Deal

Merkel agreed to the minimum wage in coalition talks after rejecting it during her election campaign. Current wage agreements below 8.50 euros, mainly in hospitality services, farming and the security business, remain in force through the end of 2016. Negotiators agreed to specify any exceptions in the law they plan to pass next year. A commission composed of labor unions, employers and academics will review the minimum wage level once a year from 2017.

“Wage floors need to be sufficiently adjustable, with the involvement of the social partners to reflect overall economic developments,” the European Commission said in report titled “Towards a Job-Rich Recovery” in 2012. “Differentiated minimum wages, as already applied in several member states, can in that context be an effective means of upholding labor demand.”

In Germany’s case, introduction of a minimum wage could directly and indirectly lead to higher wages for around a quarter of all workers as employers face union demands to raise wages just above the minimum threshold, Deutsche Bank said.

“An annual increase in the minimum wage could prejudge collective bargaining and drive wages broadly higher on top of the one-time wage push,” Deutsche Bank said. “A minimum wage would especially damp the employment prospects of problem groups that are affected above average by unemployment already today.”

To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net

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