Social Europe

  • EU Forward Project
  • YouTube
  • Podcast
  • Books
  • Newsletter
  • Membership

Yesterday’s Rubbish: Or Why Is A Minimum Wage Different From Free Trade?

Andrew Watt 4th July 2014

Andrew Watt round

Andrew Watt

Germany’s first post-war Chancellor Konrad Adenauer is usually held to be the origin of an often-quoted phrase „Was kümmert mich mein Geschwätz von gestern?“. Roughly: why should I be concerned about the rubbish I talked yesterday? Whatever the rights and wrongs of this attribution, the phrase – used to draw attention to someone who places political flexibility over intellectual consistency – has occurred to me numerous times over recent months in the context of Germany’s debate over the introduction of a statutory minimum wage.

The statutory minimum wage in Germany

The decision was finally taken yesterday in the Bundestag. Germany will, for the first time in its history, apply a statutory minimum wage of EUR 8.50 to almost all workers from the start of 2015. It is estimated that up to 3.7 million workers will benefit, and given very pronounced wage inequality at the bottom of the German labour market, the wage rises for some workers will be substantial. There is a two-year transition phase for pre-existing sectoral collective agreements. A number of groups of workers have been excluded, some permanently the majority for a transition period, from the minimum wage requirement, which has given rise to an intense debate in the country.

This debate about exemptions, as with the battle over the minimum wage more generally, has centred, unsurprisingly, on possible negative employment effects. Once the minimum wage has been introduced it will be possible to analyse its employment effects, even if this will be difficult because its impact will not be easy to disentangle from that of other factors happening at the same time. For the moment, one has to rely on studies focusing on past minimum wage introductions and increases in other countries. The thrust of that literature is that, provided the minimum wage is at a “reasonable rate”, it is very hard to identify negative employment effects in the aggregate. (For a discussion of whether EUR 8.50 is “reasonable” in the German context see here.)

What we will see though is a lot of “argument by anecdote”. Firm A in region B has been forced into bankruptcy by wage increases necessitated by the minimum wage. Worker C in city D was happy about the minimum wage when it was being discussed, but now he is furious because instead of a job paying EUR 6.50 he is unemployed. Indeed, we are already seeing this argument being deployed in the form of threats and predictions. Handelsblatt, the German business daily, recently had a piece whose title asks whether the minimum wage will lead to bankruptcies (“Pleiten dank Mindestlohn?”, Handelsblatt, 15.05.14). The article answers the rhetorical question in the affirmative, based on the opinions of the director of the hotel and catering lobby organisation, the board chairman of a chain of hairdressers, and the president of the German employers association BDA. And this concern has been expressed by many liberal economists, by employer-linked think tanks such as the Initiative Neue Soziale Marktwirtschaft[1], and, not least, by the German Council of Economic Advisers.[2]

Political flexibility or intellectual consistency?

What I find interesting here is less the specific arguments put forward (which are rather weak) than the fact that the basis for the arguments is completely at odds with the way that employers’ representatives[3], and certainly liberal economists, normally position themselves. It is as if, on the issue of the minimum wage they are collectively saying: why should I be concerned about the rubbish I talked yesterday?

Consider the debate on free trade. A country has tariffs that protect a sector of its economy. They are removed, leading to job losses and bankruptcies in the least productive firms in that sector. Do employer representatives and liberal economists favour an anecdotal approach here and call for the reimposition of tariffs in order to protect jobs and companies? On the whole they take a very different line. The production and employment protected by the tariffs is “inefficient”. Free trade brings a welcome does of competition. It enables higher incomes and a shift of production to areas in which the country has a comparative advantage. Workers who lose their jobs move to more productive occupations or regions and everyone is better off. (At least, the more sophisticated would add, this is the case after an intervening adjustment period.) Focusing on protecting “old” jobs is a barrier to productivity and progress. One cannot judge from individual job losses that the overall employment level must fall.

A similar argument is put forward with respect to technological change. Yes, some workers are thrown out of work when new, more efficient machinery and production processes are introduced. Others have to adjust through training. But here, too, the overall impact is beneficial (after a lag), because lost employment can be recouped elsewhere in the economy, as higher-productivity jobs pay higher wages that in turn expand employment opportunities for workers in other parts of the economy. If you are against technological change you are a Luddite and economically illiterate.

This begs the question why different standards seemingly apply in the case of the minimum wage. Firms facing a rise in labour costs in the wake of its introduction have a number of ways to adjust. (These are not mutually exclusive in practice but can be separated for expositional purposes.) They can increase prices. Given that the minimum wage applies across the whole economy (i.e. will not just affect individual firms) this is likely to happen. Relative prices will adjust: the prices of goods and services produced with the use of large quantities of low-skilled labour will increase relative to those using more high-skill labour and capital. The economic (not technical) productivity of the low-wage workers will rise, thanks to higher product and service prices, to match the increase in their wages. Or firms can raise their productivity (in the technical sense), through innovation and reorganisation, just like a firm facing a dose of wholesome foreign competition because tariffs have been cut. Companies may also accept a lower profitability, and the wage share would rise somewhat. (If nothing else, this would make Thomas Picketty happy).

But, undoubtedly, in some firms these adjustment strategies may not be practicable or sufficient. Some may lay off workers and others be forced to close. This is the basis for the anecdotal argument. But surely, given their normal argumentative pattern, business representatives and liberal economists should be vociferously pointing out that this is actually not a problem, certainly not an inevitable one. For as we have seen a minimum wage has very similar effects to a bracing dose of foreign competition or the “creative destruction” associated with technology. Induced productivity gains and higher wages generate additional income that sustains employment in firms across the whole economy. Those employers that cannot keep up are forced out of business. And the labour that is displaced will, or at least should[4], be rapidly deployed to other regions or sectors where it can be put to more productive use.

Yesterday’s rubbish?

From the macroeconomic point of view it makes no sense at all to lock a large proportion of the workforce into low-paid, low-productivity jobs. If they were consistent, liberal economists and employers’ front organisations should be making that point. But they are not. It could be that they have suddenly abandoned liberal views as yesterday’s rubbish. This is implausible, however. The argument still applies in other areas; see for example the salutatory effects that such commentators ascribe to the TTIP (Transtlantic Trade and Investment Partnership).

Rather the discrepancy is presumably because the same effect is produced by two different causes: trade or technological change, on the one hand, which are seen as market outcomes, and the minimum wage, on the other, which is perceived as an market intervention. This dichotomy is wrong, or at least oversimplistic, of course. Trade and technology are also highly regulated, while many economists argue that the minimum wage (at a reasonable level) is correcting a market imperfection that gives undue power to employers. But even those who believe in it should be aware of the inconsistency of using anecdotal argument from individual companies as a stick with which to beat the minimum wage.

It will be quite some time before careful studies, with all the required controls, are made of the employment impacts of the introduction of the statutory minimum wage in Germany. Until they are done, expect a lot of heart-rending anecdotal argument about job losses and bankruptcies. And when you hear or read them, remember to confront those making such arguments with Konrad Adenauer, or whoever it was who said: Was kümmert mich mein Geschwätz von gestern?

[1] In its „eight facts about the minimum wage“ the INSM states baldly (translation mine) „ The introduction of a minimum wage, whatever ist level, destroys all those jobs that no longer pay. And a job no longer pays when the employer gets less from it than he pays the worker. And so it is clear: the higher the minimum wgae, the greater the job losses.“

[2] In their annual report 2013/2014. It is worth emphasising that one of the „Five wise persons“, Peter Bofinger, dissented from the majority view on the minimum wage issue.

[3] The following may not apply to heads of individual companies, who can be very protectionist, but it usually does to those representing employer interests at national level.

[4] The word “should” here can be understood in the sense that redeployment will happen if appropriate measures are in place to maintain aggregate demand and smooth the adjustment process through active labour market policies. And of course provided the increase in the minimum wage is “reasonable” so that the employment reallocation system is not completely overwhelmed.

Andrew Watt
Andrew Watt

Andrew Watt is general director of the European Trade Union Institute.

Harvard University Press Advertisement

Social Europe Ad - Promoting European social policies

We need your help.

Support Social Europe for less than €5 per month and help keep our content freely accessible to everyone. Your support empowers independent publishing and drives the conversations that matter. Thank you very much!

Social Europe Membership

Click here to become a member

Most Recent Articles

u4219834dafae1dc3 2 EU’s New Fiscal Rules: Balancing Budgets with Green and Digital AmbitionsPhilipp Heimberger
u42198346d1f0048 1 The Dangerous Metaphor of Unemployment “Scarring”Tom Boland and Ray Griffin
u4219834675 4ff1 998a 404323c89144 1 Why Progressive Governments Keep Failing — And How to Finally Win Back VotersMariana Mazzucato
u42198346ec 111f 473a 80ad b5d0688fffe9 1 A Transatlantic Reckoning: Why Europe Needs a New Pact Beyond Defence SpendingChristophe Sente
u4219834671f 3 Trade Unions Resist EU Bid to Weaken Corporate Sustainability LawsSocial Europe

Most Popular Articles

u4219834647f 0894ae7ca865 3 Europe’s Businesses Face a Quiet Takeover as US Investors CapitaliseTej Gonza and Timothée Duverger
u4219834674930082ba55 0 Portugal’s Political Earthquake: Centrist Grip Crumbles, Right AscendsEmanuel Ferreira
u421983467e58be8 81f2 4326 80f2 d452cfe9031e 1 “The Universities Are the Enemy”: Why Europe Must Act NowBartosz Rydliński
u42198346761805ea24 2 Trump’s ‘Golden Era’ Fades as European Allies Face Harsh New RealityFerenc Németh and Peter Kreko
startupsgovernment e1744799195663 Governments Are Not StartupsMariana Mazzucato
u421986cbef 2549 4e0c b6c4 b5bb01362b52 0 American SuicideJoschka Fischer
u42198346769d6584 1580 41fe 8c7d 3b9398aa5ec5 1 Why Trump Keeps Winning: The Truth No One AdmitsBo Rothstein
u421983467 a350a084 b098 4970 9834 739dc11b73a5 1 America Is About to Become the Next BrexitJ Bradford DeLong
u4219834676ba1b3a2 b4e1 4c79 960b 6770c60533fa 1 The End of the ‘West’ and Europe’s FutureGuillaume Duval
u421983462e c2ec 4dd2 90a4 b9cfb6856465 1 The Transatlantic Alliance Is Dying—What Comes Next for Europe?Frank Hoffer

S&D Group in the European Parliament advertisement

Cohesion Policy

S&D Position Paper on Cohesion Policy post-2027: a resilient future for European territorial equity

Cohesion Policy aims to promote harmonious development and reduce economic, social and territorial disparities between the regions of the Union, and the backwardness of the least favoured regions with a particular focus on rural areas, areas affected by industrial transition and regions suffering from severe and permanent natural or demographic handicaps, such as outermost regions, regions with very low population density, islands, cross-border and mountain regions.

READ THE FULL POSITION PAPER HERE

ETUI advertisement

HESA Magazine Cover

With a comprehensive set of relevant indicators, presented in 85 graphs and tables, the 2025 Benchmarking Working Europe report examines how EU policies can reconcile economic, social and environmental goals to ensure long-term competitiveness. Considered a key reference, this publication is an invaluable resource for supporting European social dialogue.

DOWNLOAD HERE

Eurofound advertisement

Ageing workforce
The evolution of working conditions in Europe

This episode of Eurofound Talks examines the evolving landscape of European working conditions, situated at the nexus of profound technological transformation.

Mary McCaughey speaks with Barbara Gerstenberger, Eurofound's Head of Unit for Working Life, who leverages insights from the 35-year history of the European Working Conditions Survey (EWCS).

Listen to the episode for free. Also make sure to subscribe to Eurofound Talks so you don’t miss an episode!

LISTEN NOW

Foundation for European Progressive Studies Advertisement

Spring Issues

The Summer issue of The Progressive Post is out!


It is time to take action and to forge a path towards a Socialist renewal.


European Socialists struggle to balance their responsibilities with the need to take bold positions and actions in the face of many major crises, while far-right political parties are increasingly gaining ground. Against this background, we offer European progressive forces food for thought on projecting themselves into the future.


Among this issue’s highlights, we discuss the transformative power of European Social Democracy, examine the far right’s efforts to redesign education systems to serve its own political agenda and highlight the growing threat of anti-gender movements to LGBTIQ+ rights – among other pressing topics.

READ THE MAGAZINE

Hans Böckler Stiftung Advertisement

WSI Report

WSI Minimum Wage Report 2025

The trend towards significant nominal minimum wage increases is continuing this year. In view of falling inflation rates, this translates into a sizeable increase in purchasing power for minimum wage earners in most European countries. The background to this is the implementation of the European Minimum Wage Directive, which has led to a reorientation of minimum wage policy in many countries and is thus boosting the dynamics of minimum wages. Most EU countries are now following the reference values for adequate minimum wages enshrined in the directive, which are 60% of the median wage or 50 % of the average wage. However, for Germany, a structural increase is still necessary to make progress towards an adequate minimum wage.

DOWNLOAD HERE

Social Europe

Our Mission

Team

Article Submission

Advertisements

Membership

Social Europe Archives

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Miscellaneous

RSS Feed

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

BlueskyXWhatsApp