Abstract
In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.
II. The Introduction of Minimum Wage in Germany: Some Considerations1
This chapter discusses the pros and cons and potential impact of introducing a national minimum wage in Germany as undertaken by the new coalition government. It argues that the current proposed level of €8.5/hour could entail non-negligible employment effects, particularly in the more vulnerable Eastern states, with limited benefits for families at the bottom of the income distribution.
A. Why a Minimum Wage in Germany?
1. The new German coalition government is planning on a phased introduction of a national minimum wage of €8.5 per hour, effective in January 2015. Contrary to many advanced economies, Germany does not have a nationwide minimum wage. Instead, collective wage bargaining agreements are used to set wage floors in several industries. The interest in a national minimum wage has been spurred by the fact that the share of workers covered by collective agreements has been on the decline, while the low wage sector and atypical employment have risen. Low wage work not covered by collective agreements and atypical employment are more common in the non-traded services sector, while they are less common in the manufacturing sector.
Incidence of Low Pay
(Share of workers earning less than two-thirds of median earnings)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A002
Source: OECD. Missing blue bars represent unavailable data.Collective Agreement Coverage and Trade Union Density in Select OECD Countries
(Percent of employees, 2010 or latest available)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A002
Source: OECD.2. The proposed minimum wage of €8.5 per hour would be binding for a sizable fraction of the labor force, especially in East Germany. Although there is a degree of uncertainty around this estimate because data on the distribution of hourly wages is not very reliable, expert estimates indicate that the proposed minimum wage would be binding for approximately 10 percent of employees once it will become effective in 2015. This figure rises to 15-20 percent of workers in some federal states where unemployment rates are already relatively high. According to statistics from the socio-economic panel survey as of 2011, low wage earners are disproportionately concentrated in the East, among part-time workers, mini-job holders and women, and more prevalent in retail trade and business services (DIW Berlin 2013), so these groups will be affected the most by the new legislation.
Characteristics of Low Wage Earners
(Percent, 2011)
Characteristics of Low Wage Earners
(Percent, 2011)
| Share in respective group earning hourly wage lower than 8.5 euros | |
|---|---|
| Region | |
| West | 15 |
| East (including Berlin) | 27 |
| Employment status | |
| Full-time employees | 10 |
| Part-time employees | 18 |
| Marginally employed/mini jobs | 54 |
| Gender | |
| Male | 12 |
| Female | 21 |
| Total employed | 17 |
Characteristics of Low Wage Earners
(Percent, 2011)
| Share in respective group earning hourly wage lower than 8.5 euros | |
|---|---|
| Region | |
| West | 15 |
| East (including Berlin) | 27 |
| Employment status | |
| Full-time employees | 10 |
| Part-time employees | 18 |
| Marginally employed/mini jobs | 54 |
| Gender | |
| Male | 12 |
| Female | 21 |
| Total employed | 17 |
3. The draft minimum wage legislation currently under discussion in Parliament includes few permanent exemptions but some phase-in arrangements until 2017. Only youths (under the age of 18) and apprentices and interns during their education are to be exempted. Formerly long-term unemployed will be exempt from the minimum wage under certain conditions during their first six months of employment. No sector would be permanently exempt and there will not be any regional differentiation despite a much lower wage level in East Germany. However, there will be a phase-in period until 2017, during which sectors with an existing minimum wage agreement lower than €8.5 in place may continue to pay such low wages.
4. As of March 1, 2014, sectoral minimum wages for employees in 14 industries were in effect, varying between €6.50 and €13.95 per hour, 13 of them have been declared generally binding by the government. It’s worth noting that the majority of these sectoral arrangements set different minima for the eastern and western states. The phase-in exemptions may spur strategic behavior in some sectors to lock-in sectoral wages below €8.5 until 2017. For example, a generally binding minimum wage was agreed for the first time in the hairdressing trade from 1 November 2013 (€7.50 in the West and €6.5 in the East).
B. The Case for and Against the Minimum Wage
5. The arguments for and against a minimum wage reflect the trade-offs between efficiency and equity. Below we summarize the arguments taking into account the interaction between the labor market and the welfare system.
Arguments against:
While it provides a floor guaranteeing a certain level of wage income, the minimum wage may exclude low-skilled workers from employment and therefore have adverse effects on both welfare and efficiency.
In Germany, collective bargaining agreements between firms and unions have worked well and practically serve as a wage floor for many industries.
A minimum wage will hamper Germany’s competitiveness.
It is a highly distortive redistribution tool. Redistribution can be achieved with fewer distortions through taxes and transfers (e.g, by enhancing in-work benefits).
The minimum wage may lower wage inequality but not the inequality of household disposable income. Low wage earners (many of them secondary earners) are not concentrated in the lower parts of the income distribution but rather scattered across the distribution. For poor families, wage increases may replace welfare transfers and therefore be subject to high effective marginal tax rates, leaving the distribution of income relatively unchanged (Mueller and Steiner (2013)).
Arguments for:
Though minimum wages set through collective bargaining between firms and unions have worked well in certain industries, the number of workers under such schemes has fallen. In addition, such schemes typically cover better paid jobs, so they do not address the need for income redistribution toward low-skilled workers.
In Germany, the government redistributes income toward low-income workers through a wage top-off scheme (Box 1). In the absence of a minimum wage for low paid jobs, this scheme has expanded the labor supply at the low end resulting in a decline in wages. Thus employers of low-skill workers have become “windfall beneficiaries” of the government wage top-off scheme, increasing its cost and lowering the effectiveness of the program.2 A minimum wage, if set properly, would make the wage top-off program a more effective redistribution tool (Blanchard et al (2013)), though at the potential cost of some increase in unemployment.3
C. Assessing the Impact of Minimum Wage in Germany
6. The impact of minimum wage on employment is one of the most studied and debated empirical topics in labor economics. In this section, we briefly discuss the impact on employment and the net impact on aggregate consumption of the proposed minimum wage in Germany based on existing literature.
Impact on employment:
7. For modest increases in minimum wage, the empirical evidence suggests that the effect on employment is small (Schimitt (2013), Betcherman (2012), and OECD (2006)). In these cases, adjustments take place through various channels such as reduction of hours worked, reduction of non-wage benefits or training, changes in employment composition, and higher prices passed on to consumers.
8. For Germany, however, existing estimates point to non-negligible effects on employment from a minimum wage of €8.5 per hour. Available micro studies point to job losses of 60,000 to 850,000 persons (0.1 to 2 percent of employment) depending on various underlying assumptions. The labor demand elasticities found in these studies range from -1 to -0.13 and are higher in the East and for female workers, implying larger adverse employment effects for the latter groups. Some caveats are needed: (i) the majority of estimates did not take into account the proposed exemptions that were not known at the time of the analysis; (ii) the underlying surveys data are for 2011 and before, creating uncertainties in interpreting the results for introduction of minimum wage in 2015; (iii) some key analysis inputs such as distribution of hourly wages were not directly available in existing micro surveys and are estimated by employing a host of assumptions, further creating divergence among estimates. All in all, while the existing estimates maybe biased upwards, one can expect the impact to be felt stronger in eastern states due to higher share of affected workers, relatively higher unemployment rates, and larger labor demand elasticities in these regions.
Unemployment Rates in German States
(Percent, May 2014)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A002
Sources: Federal Statistical Office and Haver Analytics.Impact on income inequality and consumption:
9. while wage inequality will be lower, the inequality in family disposable income may not change much ((Muller and Steiner (2013), Knabe and Schob (2008)). The reason lies in the characteristics of low wage earners and the interaction of minimum wage with tax and benefit system in Germany: (i) many low wage earners are not from low income families, but rather secondary earners or students; (ii) higher wages for low income earners will lead to higher taxes or translate into lower in-work benefits, resulting in a small change in total disposable income for these workers; and (iii) the higher income will be partly offset by price increases, which will also curtail real income gains. As such, the impact on disposable income and aggregate consumption is estimated to be small.
Selected Studies on Labor Demand Elasticities and Minimum Wage Impact in Germany
Selected Studies on Labor Demand Elasticities and Minimum Wage Impact in Germany
| Authors | Labor demand elasticity (low wage) | Employment effect | Impact on demand | Comment |
|---|---|---|---|---|
| Muller and Steiner (2013) | −0.13 to −0.5 (West Male/Female) −0.3 to −0.4 (East Male/Female) |
50 to 300,000 (West) 15 to 300,000 (East) |
Small positive | Introduction of 8.5 euro minimum wage |
| Lichter and Peichl (2012) | −0.5 to −1 short-run/long-run |
N/A | N/A | N/A |
| Knabe and Schob (2008) | −0.75 | 850,000 | Small positive | Introduction of 7.5 euro minimum wage |
| Joint Economic Forecast Group (2014) | N/A | 200,000 in 2015 | GDP decline of 0.1 percent in 2015 |
Selected Studies on Labor Demand Elasticities and Minimum Wage Impact in Germany
| Authors | Labor demand elasticity (low wage) | Employment effect | Impact on demand | Comment |
|---|---|---|---|---|
| Muller and Steiner (2013) | −0.13 to −0.5 (West Male/Female) −0.3 to −0.4 (East Male/Female) |
50 to 300,000 (West) 15 to 300,000 (East) |
Small positive | Introduction of 8.5 euro minimum wage |
| Lichter and Peichl (2012) | −0.5 to −1 short-run/long-run |
N/A | N/A | N/A |
| Knabe and Schob (2008) | −0.75 | 850,000 | Small positive | Introduction of 7.5 euro minimum wage |
| Joint Economic Forecast Group (2014) | N/A | 200,000 in 2015 | GDP decline of 0.1 percent in 2015 |
10. Social assistance through in-work benefits may be a more targeted and effective means of income redistribution toward the lowest income groups. In Germany, 1.3 million workers in 2013 received social assistance through in-work benefits (Box 1). This is far less than the estimated 4-6 million workers that will be affected by the minimum wage. Moreover, as discussed in previous section, for low income families receiving benefits the additional wage income from the introduction of minimum wage will substitute social assistance, thereby reducing the effectiveness of the minimum wage as a measure of income redistribution. More targeted redistribution toward the lowest income groups can be achieved by enhancing means-tested benefits such as the in-work benefit in place in Germany, and gradual phase out of benefits as income rises (IMF, 2014).
D. Future Decisions about the Minimum Wage
11. With a nationwide minimum wage in place, a carefully designed mechanism to update the level of the minimum-is crucial. Countries have varying arrangements in place, ranging from automatic indexation in France to no automatic mechanism for the federal minimum wage in the U.S. (Table 2). The U.S. and Canada have systems of federal as well as regional minimum wages. The U.K. system is designed with particular care to take into account that increases in minimum wage, not only affects employers and employees but also the unemployed, consumers, and the economy at large. The Low Pay Commission in the U.K. consists of representatives of trade unions, employers’ organizations, and independent experts, all with voting rights and all serving in their personal capacity. The commission is explicitly instructed to take into account the benefits and costs to the whole society rather than just employers and employees. The current draft law in Germany envisages that future adjustments of minimum wage will be decided by the government following the recommendation of a commission comprising representatives of the employers’ organizations and trade unions (in equal numbers), a chair nominated jointly by both organizations, and two academic advisors. The latter, however, will not have voting rights.
Summary of Minimum Wage Systems in Select Advanced Economies
Summary of Minimum Wage Systems in Select Advanced Economies
| Type of minimum wage | Exceptions/Reductions | Updating procedures | |
|---|---|---|---|
| Canada | Federal and regional | Excluding some apprentices and farm workers. | No automatic indexation at federal level. Provinces vary in their mixed use of indexation rules and advisory councils. |
| France | National | Government employees are excluded. | Annual update is indexed by the consumer prices and plus half of the increase in purchasing power of average worker. An automatic compensatory increase occurs if inflation goes above 2% in the middle of the year. The government can also decide to increase the minimum wage further upon the recommendation of a council of experts. |
| Japan | Sectoral and regional minimum wages (hourly and daily) | Excludes some trainees and workers engaged in intermittent labor. | Regional minimum wages are revised each year in consultation with local tripartite minimum wage councils, taking into account changes in the cost of living. |
| United Kingdom | National | Reduced rates for youth and some apprentices and trainees based on age and tenure. | Rates are set by government based on annual reports by the Low Pay Commission (LPC), an independent body appointed by government and consisting of three trade unionists, three employers, and three labor market relations academics, all acting on their personal capacity. The remit of LPC is to maximize the minimum wage without putting the jobs of low-paid workers at risk. |
| United States | Federal and regional | Exemptions for commissioned sales employees and certain farm workers. Reduced rates for youth during the first 90 days of their employment, workers with disabilities, full-time students, and trainees. | No automatic rules at federal level. Proposals are being currently discussed for an increase and a subsequent indexation mechanism. Some regions have indexation rules. |
Summary of Minimum Wage Systems in Select Advanced Economies
| Type of minimum wage | Exceptions/Reductions | Updating procedures | |
|---|---|---|---|
| Canada | Federal and regional | Excluding some apprentices and farm workers. | No automatic indexation at federal level. Provinces vary in their mixed use of indexation rules and advisory councils. |
| France | National | Government employees are excluded. | Annual update is indexed by the consumer prices and plus half of the increase in purchasing power of average worker. An automatic compensatory increase occurs if inflation goes above 2% in the middle of the year. The government can also decide to increase the minimum wage further upon the recommendation of a council of experts. |
| Japan | Sectoral and regional minimum wages (hourly and daily) | Excludes some trainees and workers engaged in intermittent labor. | Regional minimum wages are revised each year in consultation with local tripartite minimum wage councils, taking into account changes in the cost of living. |
| United Kingdom | National | Reduced rates for youth and some apprentices and trainees based on age and tenure. | Rates are set by government based on annual reports by the Low Pay Commission (LPC), an independent body appointed by government and consisting of three trade unionists, three employers, and three labor market relations academics, all acting on their personal capacity. The remit of LPC is to maximize the minimum wage without putting the jobs of low-paid workers at risk. |
| United States | Federal and regional | Exemptions for commissioned sales employees and certain farm workers. Reduced rates for youth during the first 90 days of their employment, workers with disabilities, full-time students, and trainees. | No automatic rules at federal level. Proposals are being currently discussed for an increase and a subsequent indexation mechanism. Some regions have indexation rules. |
Germany’s In-Work Benefit System
Many advanced economies including Germany use in-work benefits as part of their social protection arrangements. These programs, basically acting as negative income taxes, deliver welfare benefits to low income families while encouraging work. Examples include the Earned Income Tax Credit (United States) or Working Tax Credit (United Kingdom).
In Germany, the in-work benefit system is administered as Unemployment Benefit II (also known as Hartz IV benefits, or wage top-offs) and works as follows: For low-paid workers or job seekers whose regular unemployment benefit has expired, the government covers—under a number of conditions—the difference between the “normal requirement” for living and earned wages. The “normal requirement” as of January 2013, is € 382 per month for a single person (additional 90 percent for the partner and 60-80 percent for children) plus housing, heating, and healthcare benefits. The recipients of top-offs are required to actively pursue integration into the labor market and may be required to accept “reasonable” legal job offers. The rules governing what is considered a “reasonable” job have been tightened with the 2005 Hartz IV reforms.
The number of workers receiving social assistance is far lower than those affected by the minimum wage. In 2013, 1.3 million workers received social assistance in the form of in-work benefits, far lower than the estimated 4-6 million working on hourly wages below € 8.5 per hour. This is because many of low wage earners are secondary earners or students who live in families where the primary earner receives a sufficiently high income so as to not qualify for social assistance.
References
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Prepared by Faezeh Raei (EUR).
For an empirical assessment of this effect in the case of the U.S. see Rothstein (2010).
For a theoretical analysis showing that a minimum wage can facilitate income redistribution toward low-skilled workers, see Lee and Saez (2012).
