German Minimum Wage – From 2017 onwards, there will be an overall statutory minimum wage of €8.50 in Germany. As a consequence of this landmark decision of the incoming Grand Coalition, there will be an increase in the unemployment rates of unskilled workers – yes or no? Economists tend to answer the question in the usual way: it depends on the circumstances! This is true, for sure. The main variables in this debate are wage rates and individual productivity. The mainstream argument goes as follows: if wages are set at a too high level you will price out unskilled workers, i.e. you will cause unemployment. Unfortunately, good individual productivity data are scarce. So, let’s have a look at proxy variables! We will proceed in two steps.
1. The distribution of earnings and competences: Distance to median
As shown in Figure 1 and Table 1, the distribution of earnings is by far more uneven than the distribution of competences. Let’s have a closer look at the German case: gross monthly earnings for full time work is at €2,728, with a bottom line (1. decil) at €1,243 and top incomes (9. decil) at €5,126. In clear contrast to this uneven distribution are PIAAC scores in numeracy which seem to be the more relevant domain for labour market issues. The low performers again measured at the 1. decil level achieve 201.9 points on a scale ranging from 0 – 500 and the high performers 335.0. The uneven distribution can be seen if the 1. decil and the 9. decil are compared according to their distance from the median. In Germany, the high performers in numeracy are 21% better than their colleagues at the median, but they earn 88% more. And the opposite is true at the bottom of the distribution: the low performing participants earn only 46% of the median incomes but achieve a score at 73% of the median. As has been said already: the distribution of earnings is by far more uneven than the distributions of competences!
2. German Minimum Wage – The PIAAC scores in numeracy as a proxy for general productivity
In the second step of the argumentation we assume, firstly, that PIAAC scores in numeracy can be used as a proxy for a general productivity level, i.e. productivity not specific to particular jobs. And, secondly, that in the middle of the distribution incomes and productivities go hand in hand. If this is the case, than we can conclude:
a) In Sweden, for example, an increase in wage rates of low incomes would lead to unemployment because of comparatively high minimum wages.
b) This would not be the case in Germany. Here is room for maneuver to increase minimum wages. For many workers, this increase of their wage rates would be in line with their productivities. So no need for concern!
c) In stark contrast to the situation at the bottom line is the situation for high income workers: earnings are far higher than productivity!
A rather unfair situation.