A law in need of revision

By introducing a statutory minimum wage on January 1, 2015, the government is engaged in massive interference in wage formation. This poses a challenge for the labour market, particularly in eastern Germany. International experience has shown that a gradual approach would have mitigated risks to the labour market.

Germany’s first-ever nationwide minimum wage is to be introduced on January 1, 2015, at the initial level of 8.50 euros per hour. It will apply to all workers with the exception of apprentices, volunteers and young people under the age of 18 who have not completed vocational training. There are also special provisions for trainees and the long-term unemployed. Roughly 13.7 percent of all employees – 4.6 million people – are likely to be affected. By taking this step, the government is seriously interfering in the wage-formation process. This is an issue particularly in the eastern region of Germany, where nearly twice as many workers will be affected as in the west. To reduce the share of employees affected to the same level as in the west, the minimum wage in eastern Germany would have to be set at no more than 7.00 euros per hour.

The minimum wage poses a serious challenge to the labour market, particularly in the east. It is clear from the experience of France and the United Kingdom that a more moderate approach would have been advisable. When the UK introduced a minimum wage in 1999, only 5.5 percent of employees were affected. Furthermore, the Kaitz index – the ratio of the minimum wage to the average wage – was 42 percent, which is lower than it will be in Germany. Assuming that hourly wages will increase at an annual rate of 2.5 percent, Germany’s Kaitz index will be 46 percent at the beginning of 2015. While France’s Kaitz index is substantially higher, at 62 percent, wage subsidies are provided to employers in France to reduce the payroll costs of low-wage earners. This costs the government more than 20 billion euros per year.

Labour market risks can be mitigated by exempting certain problematic labour market groups from the minimum wage or paying them a reduced wage. One positive note is that the long-term unemployed will be exempt for six months. That period should be extended to 12 months, in line with comparable collective bargaining agreements. After six months, one might consider a gradual increase to the statutory minimum of 8.50 euros per hour. However, the federal government should adjust the lower age limit. In the case of young people who have not completed vocational training, the minimum wage should not apply until they reach the age of 21; this would prevent individuals from an educationally disadvantaged background from choosing to forgo training.

It would be even better to exempt all career beginners who have not completed vocational training. Moreover, the proposed exceptions do not go far enough in the case of internships related to training or university studies. Unless adequate exceptions are made for the weakest groups of employees, over the medium term the federal government will have to subsidise the minimum wage, as is the case in France.

Provisions for adjustments in the minimum wage also need to be revised. The responsible commission should not base such adjustments only on changes in pay rates, but also on developments in the labour market and the economy at large. Its recommendations should always be based on a scientific assessment of the effects of the minimum wage. Provisions to that effect should be included in the minimum-wage law.