The German minimum wage: an interview with IAB Director Joachim Moeller
conducted by Hannah Ormerod
Hannah Ormerod: Professor Moeller, the next topic which I would like to discuss with you is this question of newly implemented German minimum wage. When was the minimum wage introduced in Germany and why?
Prof. Joachim Moeller: One has to distinguish: we had a sectoral minimum wage in several branches of the economy, and the first minimum wage was introduced in 1997 in the German construction sector – relatively high minimum wage at that time, different levels in East and West Germany. By the way, we examined the impact of the minimum wage, and we found out that there was no effect on employment in the West, but there were some hints of negative effects in the East, because in the East, the level of the minimum wage in relation to the medium wage – the mean wage – was relatively high. And so, other branches introduced minimum wages as well. But in 2015, on the 1st of January, general minimum wage – statutory minimum wage – was introduced of EUR 8.50, with some but only few exceptions for some industries. Yet, it is an interesting question: why so late a minimum wage in Germany? And the answer is: 10 or 20 years ago we had a really high coverage of union bargaining, of collective bargaining, and in such a system you do not need a minimum wage – like in Scandinavian countries, where the coverage of collective bargaining is almost 100 per cent. Then, you do not need an extra minimum wage. But we had over time this enormous decline in the trend of the coverage of collective bargaining – especially also in the East, by the way. I think the economy came to a point of the urgent need of a wage floor, and this was introduced in 2015 after, I think, heavy discussions between economists or also within, of course, the different political parties. But the grand coalition made it to one of their key points for the current period, and so it was introduced. I am sure, in the end it is a success, although many people were very sceptical, especially economists were sceptical before the introduction. But it turned out that the fears of huge employment losses were not realised.
A further aspect of the German system is that many people top up their earnings by public subsidies in order to get earnings that are needed to fill the basic needs. And more than 1.3 million people are behaving this way. So, the idea of the minimum wage was also to reduce the number of people that are forced to top up their incomes. But the expectations were too positive in this respect. The minimum wage did not succeed really in reducing the number of these workers substantially, and we know the reason why that is the case. It is because many of these people – we call it the Aufstocker – they work only few hours, and even if they get a minimum wage, it is not sufficient to get a level that fills the basic needs, so they are still dependent on public subsidies. There are only roughly 40,000 to 60,000 of people that are now earning so much that they are not depending on the system any longer. For some people it was bad news – they were more optimistic in this case. But as labour market researchers, we knew that already before that this was not to be a substantial effect. A final point that is really interesting – we can see it very clearly in the data. In the German system, we have the so-called mini-jobs: these are jobs with only typically few hours a week and with a limit of earnings that can be achieved by the workers. Today it is EUR 450. And this sort of jobs were substantially declining after the introduction of the minimum wage. We can see it, the data is very clear and the effect is very clear. What happened is that the firms transformed these mini-jobs into, say, normal employment eligible to social contributions. In my opinion, this is a very favourable effect, because mini-jobs – they do not pay regular social contributions – they only pay lump sum tax, or the employers pay lump sum tax, but there are no normal contributions to the social security system. And of course we are interested in having a lot of workers paying for the social contribution system. And, I think, that is one very positive effect of the minimum wage.
Hannah Ormerod: What do we know about the current impact of the minimum wage on the German economy? Is there anything we can say at this stage?
Prof. Joachim Moeller: We have some negative effects in Eastern Germany, but, in general, the effects are – in relation to the total amount of the workforce – really minor. It was expected that – if there are negative effects, then it would be in East Germany – because wages in East Germany are roughly 20 – 25 % lower than in the rest of Germany. And in some regions – especially in the rural regions of East Germany – the level of pay is really-really very low, and so the bite of the minimum wage in this region was much higher than, say, in a region like Munich or Hamburg, where you have really much higher wages on average. Our first estimates for the size of the effect are in the order of magnitude of 60,000 jobs. Sounds a lot, but if you compare it with another number: 600,000 of jobs that are newly created year-by-year in the last years. So, that is ten-fold the size of what was perhaps lost by the minimum wage.
Hannah Ormerod: At the moment, the German economy is doing very well. Do you expect the minimum wage to have a more negative impact on employment in the case of a recession?
Prof. Joachim Moeller: Some colleagues have this expectation. I do not have it, or I have another opinion. What are my reasons? I think that the next recession is very likely caused by an external shock, hitting the export industries. We know that the export industries – manufacturing industries, for example – they pay really high wages, and the minimum wage is not a point for them: they typically pay much higher wages. So, for cushioning the shock, the minimum wage does not play a crucial role in my view. So, the minimum wage is payed typically in low-qualified services, like hotels and restaurants, for example. And I think this part of the economy is relatively robust against the business cycle. So, I do not think that this will be a really major point for the next recession. And a recession is typically ended if aggregated demand recovers and not by reduction in wages – I do not believe in this mechanism.
Hannah Ormerod: A last question I have on this topic of the German minimum wage is how big a role has it played in stimulating domestic demand did you think?
Prof. Joachim Moeller: There might be some effects in some sectors of the economy. In general, we can see the positive wage effects for the people affected by the minimum wage. And, as I said before, there was no dis-employment effect so that there is a positive effect on the wage bill in general – the aggregated wage bill. And in my opinion, this typically is valid for people that belong to low-income groups. For example, if someone gets higher earnings and this person is able to go out to a restaurant once more a month or so, then, of course, it is a positive impulse for the hotel and restaurant sector. What we really see is that the sectors that are heavily affected by the minimum wage, they are profiting from this demand effect; for example, the hotel and restaurant sector, which is really booming, and it is expanding the employment. So, to some extent perhaps they are suffering from higher cost, on the other hand, they are favoured by higher demand and the counterweighing effect.