The German economy is doing well, but how are things for German workers? More and more pay packets are falling below the social minimum needed to survive. One reason for this is Germany’s lack of a minimum wage.
The introduction of a minimum was one of the main election issues, and more and more political parties gathered behind this plan. A CDU/CSU–SPD cabinet, which was the most logical outcome of the recent elections, will still face a hard fight ahead around the minimum wage. The SPD wants a national version, while Merkel is interested only in a minimum wage for each industry and region. Why is a minimum wage so important for German workers? Together with journalist Rik Delhaas, I went to Germany at the end of August to see how the German labour market is faring, and above all to find out how Germany has been able to keep unemployment so low in a time of crisis, and has even enjoyed a little economic growth.
We visited the Ruhr, nowadays already known as the poorhouse of Western Germany. Here the factory chimneys once smoked while the motor of the German economy spun at full revs. The era of heavy industry is gone, and the region once responsible for Germany’s postwar economic miracle has fallen on hard times. The solution has been sought in wage moderation and so the low-pay segment is growing faster in Germany than anywhere else in Europe.
Early in the morning, we visited Valerio and his family. We aren’t using his real name because he fears that it could have repercussions at work, and he is about to get a permanent appointment at last. For years he has been earning a very meagre income through temporary jobs and short-term contracts. He made sun blinds, so he had less work in winter than in summer. Currently he has been putting in some 53 hours a week which earns him €1,100 net. Together with his wife, who has a chronic illness and occasionally earns a little on the side from short temporary jobs, their child and a son from a previous marriage, they cannot get by on this money. So they draw a supplementary income benefit, which involves filling in countless forms and spending hours of queuing at the job centre.
Since the enactment of Harz IV – a package labour market reforms – many new jobs have indeed been created, especially at the lower end of the social gradient. These so-called “mini jobs” and “one-euro jobs” are cheap and flexible for the employers. Besides, employees do not have to pay all the social insurance contributions, although they consequently miss out on the corresponding benefits. In the absence of a minimum wage, the pay for jobs like these is often wretched, and hourly rates of 3 to 5 euros are not exceptional. All these people receive the Harz IV benefits, and social security compensates home rent up to a certain level. However, they now no longer count as unemployed. This is the downside of the German Jobwunder which European economists laud so fervently: inequality is rising, and more and more Germans cannot get by on their wages.
Valerio refers to it as modern slavery. He considers it pointless, because keeping wages depressed will not succeed in boosting competition with Asia: “Human rights aren’t respected there so you can’t win. To beat them at their game, you’d have to introduce child labour here too.” Before waving us off and going to bed, he sighed, “It’s a terrible thing that I have to work so hard, yet I still can’t even support my family.”
On that subject, Oliver Stettes holds an entirely different opinion. Stettes, a labour economist, is convinced that labour costs will have to fall, and that having a job is always more important, even if you don’t earn enough by it. In his spacious office at the employer-funded Institut der deutschen Wirtschaft in Cologne, with a view of the Rhine, he poured us tea. Reports in the German press of mounting poverty, of families fallen into debt and of grandparents who have to be shipped off to elderly homes abroad where, he argued, a campaign by the labour unions: “Poverty has not increased in Germany.” That is true in absolute terms, but the gap between rich and poor clearly has increased. The lower end of the social-economic spectrum has not shared in the spoils of Germany’s rising prosperity. Stettes disagreed: “We have to look at things the other way round,” he insisted, “first find work, and then if necessary get extra support, instead of vice versa.” He accordingly opposes the introduction of a minimum wage throughout Germany. “It will cost jobs,” he said, handing me a booklet about the German low-wage sector. “It’s a straight choice: higher pay, or more jobs. Once people have come back to the labour market, they will gradually move up to better paid positions.”
The evidence does not support the last statement, however. Poorly paid “flexible” jobs, cheap though they are for employers, generally replace regular employment, especially in the catering, agriculture and construction sectors. Opportunities to find a well-paid job are scarcer simply because there are fewer of them. Only 17% of jobholders earning below the social minimum (defined as anything less than two thirds of the mode income) found permanent work in 2010 and 2011, according to a study by the Nuremburg Institut für Arbeitsmarkt und Berufsforschung.
The only way?
Is the widening gap between rich and poor the price the German economy has to pay to stand up to the crisis? Not according to Gerhard Bosch, director of the Institut Arbeit und Qualifikation at the University of Duisburg-Essen. One of the worst misconceptions, in his view, is that low wages are necessary to keep the economy in good shape. “The prosperity of Germany is attributable to rising exports of high quality products, made by highly trained, well-paid personnel. That is the healthy pillar of the German economy, but low wages have caused a huge decline in consumer buying power, and that presents a major problem.” Bosch observed that Germany’s social market economy has undergone drastic changes in the last ten years. It can hardly be called social any more, in his view – not even in comparison to other European countries. “After reunification of the two Germanys, the country contended with a high level of unemployment, which we tried to deal with by wage moderation. Purchasing power fell, followed by domestic demand. Around 2000, a worry arose that Germany was at risk of losing its international competitive position. The response was a further lowering of wages, privatization of public corporations and deregulation of the labour market. The combination of exploding export growth and low wages triggered a dramatic fall in domestic demand. This situation was a contributory cause of the European crisis.”
Not lowering, but raising, wages is in Bosch’s view the right answer to the crisis, combined with innovation. “Germany shouldn’t try to compete with Asia but should do what it is good at: making high-tech products.” The second answer, according to Bosch, is education. There are more untrained workers in Germany than there are untrained jobs. Until this situation changes, job seekers will continue to need government support. “A situation of extreme exploitation now exists in Germany. People are severely underpaid; the employers profit because the State tops up the salaries to a minimum level. We are still some way from American-style situations here, but the mini-jobs under eight Euros and the one-euro jobs must be got rid of as soon as possible. Many employers are dodging the already small legal requirements for these jobs, such as pay during sickness and holidays. The first step is to enact a minimum wage for the whole of Germany. Studies of industries that already have a minimum wage show that bringing in a minimum wage will not trigger job losses, as some people claim.”
Introduction of a minimum wage was an important issue in the German elections. The SPD politician and deputy mayor of Cologne, Elfi Scho Antwerpes, is convinced that it must be brought in as quickly as possible. Most members of the public who opened the front door to her during her door-to-door campaign, on which we accompanied her, agreed. The hourly minimum must be €8.50 in her view. SPD candidate Peer Steinbrück assented to this twice during a televised electoral debate with Angela Merkel on 1 September: “Everyone should be able to live from a full-time job.” The SPD also calls for a law to guarantee that women will receive the same pay as men for similar jobs, that is often not so.
Die Grünen, too, want a minimum wage of €8.50, plus a rise in the Harz IV benefit to €420 monthly (presently €386). For Die Linke, the corresponding targets are €10 and €500; they also want an upper annual salary cap of half a million euros. Even the liberal FDP, which had always resisted a minimum wage, has now come around because of the many abuses, but like CDU/CSU this party favours only an implementation per industry and per region. Had the Left and the Greens pulled off a “red-green” coalition, such as the leftist block hoped for, a minimum wage would have been brought in. Now that Merkel rules the roost once again, the best outcome will probably be endless sector-based negotiations, with inequality between industries and regions as their inevitable consequence.
Rik Delhaas recorded a report based on this trip to Cologne for VPRO Radio, which was broadcast on 1 September. It is now available as a webcast here.
An extended version of this report is available on De Helling.
Gerhard Bosch, Prekäre Beschäftigung und Neuordnung am Arbeitsmarkt. Expertise im Auftrag der Industriegewerkschaft Metall, Institut Arbeit und Qualifikation, University of Duisburg-Essen 2013.
Gerhard Bosch, ‘Low wages in Germany and the European imbalance problem’, in Thomas Palley and Gustav Horn (ed.) Restoring Shared Prosperity: A Policy Agenda from Leading Keynesian Economists, CreateSpace.com, appearing soon.
Lebenslagen in Deutschland. Der vierte Armuts- und Reichstums bericht der Bundesregierung, Bundesministerium für Arbeid und Soziales, March 2013.
‘Mindestlohn sticht Aufstiegschancen’, Frankfurter Allgemeine Zeitung, 30.8.2013.
‘Mindestlohn gegen Misstände’, Süddeutsche Zeitung, 27.8.2013.
‘Volkes Stimme’, Süddeutsche Zeitung, 27.8.2013.