On October 1, the minimum wage in Germany will rise to twelve euros – a whopping increase of 15 percent. And more demands keep coming. Ironically, a prominent entrepreneur demands 20 euros. That should fuel inflation further.
Sebastian Dettmers is certainly not predestined to please trade unionists. The CEO of the job platform Stepstone has strong political opinions and made them public on the big stage in his sensational book “Unemployment”. Many of the ideas expressed there are those of a liberal mind and not those of a leftist. But one aspect probably surprised everyone: the minimum wage in Germany is to rise to 20 euros.
The reasoning is: “The past 250 years have shown one thing above all: when unproductive jobs no longer pay off, higher-quality jobs take precedence. If work becomes more expensive, the incentive to invest in education and machines increases.” A minimum wage creates incentives for the state and companies to automate simple activities and to invest more money in people’s qualifications. And: “We can no longer afford cheap work in a high-tech country,” says Dettmers.
On October 1st, the federal government increased the minimum wage from 10.45 to 12 euros per hour. This plus of 15 percent has been the subject of months of debate, the regulation has been known for a long time and affects around a third of German companies – so many currently employ people with wages of less than 12 euros. In order to classify the amount, a comparison with the average salary is useful: The 12 euros correspond to almost 60 percent of the average median income of full-time employees. “This is very high in an international comparison,” says Christoph Schröder, an expert in the world of work and collective bargaining at the German Economic Institute (IW). In countries with a similarly high level, such as France, employers are often heavily subsidized by the state so that the minimum wage does not lead to job losses.
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The extent to which companies are affected by the increase in the minimum wage varies greatly by region. In western Germany, far fewer companies employ people for less than 12 euros an hour than in the east. There are also differences between the sectors: In the catering trade, 78 percent of the companies surveyed are affected. The retail trade with 58 percent, the textile industry with 72 percent and the food and beverages industry with 61 percent of the companies are also affected above average.
What does the expert think of Dettmer’s proposal to go to 20 euros in the coming years? “Raising the minimum wage even more drastically would push the wage distribution together in the lower half of the income distribution and thus tend to reduce educational incentives, especially in the lower qualification area,” says Schröder. Then there would be a great danger that this would lead to a split in society. “Of course, this is all the more the case if the minimum wage is too high and there are job losses.”
A recently published study showed that the introduction of the minimum wage in Germany led to a shift of workers away from less productive to more productive companies. “This means that jobs in lower-paying companies are disappearing and employees are frequently switching to better-paying jobs,” says Johannes Seebauer, labor market economist at the DIW. “The minimum wage will certainly continue to rise in the coming years.” How quickly it will reach the 20 euros mentioned depends not least on political considerations and not least on the development of productivity and general wages. “A minimum wage can help ensure that employees are actually paid according to their contribution to the company’s success and benefit from increases in productivity,” says Seebauer. In reality, employees would often accept a lower wage than the added value generated by their work for the company. “This happens, for example, if they are only insufficiently informed about the earning potential in alternative jobs.” Criteria that are independent of wages also play a role when choosing a job, such as working hours, the commute or the social environment.
The economist is ambivalent about Stepstone boss Dettmers’ argument that a high minimum wage prompts the state and companies to automate simple activities and invest more money in people’s qualifications. “A minimum wage can lead to employers investing more in training and further education of their workers in order to offset the higher personnel costs through the productivity increases achieved in this way.” If labor becomes more expensive relative to capital, substitution incentives would also arise. However, this doesn’t apply unrestrictedly to all jobs: “The work of a hairdresser is, at least in the short term, much more difficult to automate than, for example, that of a supermarket cashier, where self-checkout tills are already being used in some cases.”
This statistic shows how much the level of the minimum wage affects the consumer: According to a survey by the economic research institute Ifo rubd, the increase to 12 euros causes 60 percent of German companies to raise their prices. “That should continue to drive the already high inflation,” says Ifo labor market expert Sebastian Link. Due to the higher minimum wage, 18 percent of companies are considering cuts in additional wage components such as special payments, bonuses and non-cash benefits. “The vast majority of affected companies do not plan to replace labor that has become more expensive with capital or to invest in the knowledge of employees to increase their productivity,” says Link. It would probably be the best way to ensure high productivity in the long term.
The contribution “minimum wage must rise to 20 euros” comes from WirtschaftsKurier.