The German Minimum Wage: Experiences And Perspectives After One Year

After more than 10 years of political debate Germany for the first time introduced a general minimum wage of €8.50 per hour on 1^st January 2015. This was a response by German legislators to the continued erosion of the German collective bargaining system and declining bargaining coverage. Currently only 58% of all employees are covered by a collective agreement. Many private service sectors have faced a particularly sharp decline in collective bargaining coverage, which has resulted in a continued expansion of the low-wage sector.

The introduction of the minimum wage took place against the resistance of most industry and employers associations, which were supported in their negative attitude by large numbers of German economists. The latter had warned in numerous studies prior to the minimum wage introduction that up to a million jobs would be lost.

The Institute of Economic and Social Research (WSI) has now presented a first comprehensive review of the first year since the introduction of the minimum wage, with clear evidence that millions of workers have benefited from it without the predicted negative impacts on the labour market.

Above-average wage increases in the low-wage sector

With the new minimum wage the long-term trend towards higher wage inequality in Germany has reversed for the first time. In 2015, unskilled and low-skilled workers experienced above-average wage increases. While the overall gross hourly earnings had increased by 2.0% by the third quarter of 2015 compared to the same quarter of 2014, semi-skilled workers experienced a 2.4% and unskilled employees a 3.7% wage increase. Particularly high wage increases can be found in Eastern Germany, where semi-skilled workers gained 5.5% and unskilled workers even 8.2%. Similar observations can be made for employees in so-called ‘mini jobs’ (a special form of marginal part-time employment), whose wages also increased significantly faster than those of other employees.

Finally, the impact of the minimum wage can also be seen in the above-average wage increases in some traditional low-wage sectors, such as the meat industry, retail trade or the security sector. In East Germany, wages in these industries even showed double-digit growth.

On the basis of the available data it is not yet possible to say exactly how many employees have ultimately benefited from the introduction of the minimum wage. In 2014, however, there were still 4.8 to 5.4 million workers who earned less than €8.50 per hour. This represented between 14.8 and 16.6% of all employees. Among women, the proportion with less than €8.50 per hour was twice as high as among men.

The impact of the minimum wage on collective bargaining

Even before the introduction of a statutory minimum wage, the debate had already exercised a strong influence on German collective bargaining. So far sector-specific minimum wages, which were negotiated by employers’ associations and trade unions and then declared generally binding, apply to 19 sectors of the economy.

In most industries, collectively agreed minimum wages are now above €10 per hour. In a few sectors, however, such as hairdressing, meat industry and agriculture, forestry and horticulture, collective agreements with wages below the legal minimum still exist. This possibility was created by the legislature for a transitional period of two years. From a trade union point of view this incentive offered the chance to rebuild stronger collective agreement structures within the respective industries.

Finally, the debate about the minimum wage has also helped to raise the lowest wage groups in collective agreements much faster. While in 2010, there were still 16% of the collectively agreed wage groups below €8.50 per hour, this proportion fell to 6% in January 2015 and finally to only 3% in January 2016.

Effects on the labour market

Contrary to the horror scenarios of many German economists,  registered unemployment in Germany is today lower than it has been for a long time. According to the Federal Employment Agency, there were 713,000 more employees covered by social security in October 2015 than in the same month of 2014. This represents an increase of 2.3%. In Eastern Germany the employment growth was slightly lower – at 1.9% – than in West Germany with 2.4%. The strongest increase in employment can be observed in hotels and restaurants with 6.6% followed by other economic services, agency work, care work and social services, transport and storage. Thus, a range of classic low-wage industries, which had to cope with particularly high wage increases, also experienced a higher than average employment growth.

Even so, a decline of nearly 133,000 jobs was observed among the marginally employed.with a particularly pronounced drop of 4.7% in Eastern Germany compared to a modest decline of 1.3% in West Germany. However, the reduced number of mini-jobs does not necessarily correspond to an equal number of job losses. According to a study of the Institute for Employment Research (IAB) just over half of that decline can be explained by the affected employees having changed to an employment relationship subject to social insurance. About 40% of the former mini-jobbers have not been accounted for, but the IAB assumes that the majority of these are no longer available to the labour market. The share of former mini-jobbers who then reported to be unemployed was very low at 4%.

In conclusion, it can thus be said that so far no indications can be found that the introduction of the statutory minimum wage has had negative effects on the German labour market. To a limited extent it may even be assumed that it has brought an additional gain in purchasing power that has strengthened domestic demand and thus the creation of new employment opportunities.

How should the statutory minimum wage be adjusted in future?

Against the background of the socially and economically very successful implementation of the minimum wage the question of future adjustments to its level is now on the agenda. In terms of the German Minimum Wage Act (Mindestlohngesetz,  MiLoG) the adjustment is to be decided upon by the Minimum Wage Commission specifically established for this purpose and made up equally of three representatives from trade unions and employers respectively plus one independent chairperson. The Commission has to decide on any adjustment every two years, whereby the first resolution is to be taken on 30 June 2016 and come into effect on 1 January 2017. In this respect the commission is to verify “within the framework of an overall assessment what level of minimum wage is proper to contribute to an appropriate measure of protection for employees, to allow for fair and well-functioning competitive conditions and not to threaten employment.” Furthermore, it was determined that the Commission should take into consideration “the previous developments of collectively agreed wages” (German Minimum Wage Act § 9).

According to information from the Federal Statistical Office the index of collectively agreed wages (without special payments) that is decisive for the Minimum Wage Commission increased by 2.9% in 2014 and by 2.5% in 2015. For the entire period of two years this results in an increase of 5.5%. This would mean that €9 is the guiding value for the next adjustment in the German minimum wage.

However, the Commission also has a certain scope within decision-making that allows it to deviate from this orientation mark down or up. Owing to the healthy situation on the labour market there are no reasons for any downward deviation. For an upwards change, however, the argument can be made that the level of the minimum wage is still very low given the existing cost of living in Germany.

In the end, the most appropriate minimum wage level must be assessed by whether it can actually guarantee a certain minimum subsistence level. In discussions about the German minimum wage the stated aim has repeatedly been that wages should allow for a decent life without additional state benefits– at least for single full-time employees. In many cities and regions of Germany this would require a rise in the minimum wage to well above €9.

Further Reading:

Marc Amlinger, Reinhard Bispinck, Thorsten Schulten:  The German Minimum Wage: Experiences and Perspectives after One Year, WSI Report No. 28e, Düsseldorf, January 2016.