Germany on the way to adequate minimum wages

The hike to €12 is also a strong signal on the planned European minimum-wages directive.

With the new German government of social democrats, liberals and greens having concurred on an extraordinary minimum-wage increase in its coalition agreement, the Ministry of Labour has now presented a draft of a Minimum Wage Increase Act (Mindestlohnerhöhungsgesetz). According to the bill, the statutory minimum will be increased to €12 per hour from October 1st—a rise of nearly 15 per cent, affecting more than six million low-paid workers and, on the face of it, giving Germany the second-highest minimum wage in Europe after Luxembourg.

Germany only introduced a statutory minimum in 2015. Previously, minimum wages were set exclusively by collective agreements, as is still the case in the Nordic countries. Since the mid-1990s, however, collective-bargaining coverage had steadily declined with one of the largest low-wage sectors in Europe emerging. Against that background, German trade unions changed their previously very sceptical position towards statutory minimum wages and ran a big campaign for a national wage floor.

Most employers, however, opposed the introduction of a minimum wage, foreseeing possible negative consequences for the economy. They were supported by many economists who predicted that up to one million workers would lose their jobs with the new minimum wage.

Strong pay rises

Yet many studies were to show that the statutory minimum wage led to strong pay rises for some low-wage workers without significant negative effects on the labour market. The original setting, of €8.50 per hour, was however rather low, equivalent to just 48 per cent of the median wage of a full-time worker. Accordingly, it could not meet the expectations of providing a decent income and reducing the low-wage sector. Succeeding increases were incremental rather than transformative (see graph).

Germany’s statutory minimum wage since its introduction in 2015 (€ per hour)

According to the existing German Minimum Wage Act, regular adjustment of the minimum wage should follow proposals by the Minimum Wage Commission, which was established in 2015 and is composed of three representatives each of trade unions and employers’ associations and an impartial chair (plus two academic experts without voting rights). The commission should make an overall assessment with a particular view on an appropriate minimum level of protection, the existence of fair competition and the impact on employment. Moreover, it should take into account the development of collectively agreed wages as an orientation. In practice, the latter have become the major guideline for adjustment of the minimum wage since its introduction.

The commission depends heavily on the ability of unions and employers’ organisations to reach a compromise. This tends to promote gradual adjustments, with step-change increases likely to be blocked by the employers. In effect, the government now seeks to impose politically a one-off hike. After the increase to €12 has taken place, however, further adjustments would again be based on commission proposals.

In the ‘recitals’ of its draft bill, the government justifies this approach by the need to increase the scope of minimum-wage protection. The current German minimum wage is not at all sufficient even for a full-time worker to meet his or her needs, without additional additional state support, and is far too low to merit a state pension above the basic. An uplift to €12 would bring it much closer to the notion of a living wage.

European directive

The government also refers to the European Commission proposal for a directive on adequate minimum wages across the European Union. Up to now, the German minimum wage has been far from the reference values of 60 per cent of the gross median wage and 50 per cent of the gross average, internationally used as thresholds for adequate minimum wages. With the increase to €12, the German minimum would however come close to 60 per cent of the median. The legislation can therefore be regarded as an early implementation of a future European directive.

The European Parliament and the Council of the EU having formulated their sometimes divergent views on the proposed directive, they today enter into ‘trilogue’ negotiations with the commission to find a compromise. Previously, the German government has not played a very active role, as the former Große Koalition between social and Christian democrats had no common view.

In contrast, the new Ampelkoalition affirms that it endorses the proposal for a directive and supports ‘binding minimum standards’. As the government has presented a draft bill to bring the German minimum wage to an adequate level, it should now be expected to play a more active role in promoting a European solution.