Government and Institutions

Germany’s new minimum wage may fuel the drive for EU involvement in wage-setting

For a long time, Germany did not have a national minimum wage – although unions, bargaining at industry level, were able to negotiate minima which held across all firms in specific industries. With the decline in industrial bargaining, the Social Democratic Party (SPD) increasingly pressed for a national minimum. As part of the recent coalition agreement with Angela Merkel’s Christian Democrats, the principle of a minimum wage was eventually agreed. It now appears that the rate (coming into force next January, if all goes as planned) will be lower than anticipated at 8.50 euros an hour, about £6.80.

While this is a little higher than the rate in the UK (currently £6.31 per hour, rising to £6.50 in October), the ‘bite’ of the minimum – its value as a proportion of median earnings – will be about the same.

The new German minimum has been firmly opposed by business organisations, who see the dangers in government wage-setting – unlike in the UK, where opposition to the NMW is muted and a growing number of larger firms have been talking up the idea of the Living Wage, a much higher figure of £7.65 in the country as a whole and £8.80 in London.

The unpopularity of the SPD’s policy with business has led to a range of concessions. There will not be regular annual reviews of the rate until 2018. Some smaller firms will be given a period of grace (up to two years) to bring in the minimum. More generally, the rate will not apply to young people, to trainees, to interns and to the long-term unemployed for their first six months of a new job. These latter two concessions are something we could learn from in the UK. Interns and those out of a job for a long time are risky for employers to take on and it does not encourage employers to take that risk if they cost the same to employ as more established workers.

So Germany’s competitiveness will probably not suffer significantly from the introduction of a minimum wage in the short run. However the largest EU economy’s adoption of a minimum means that there are now only six member countries without a floor on wages. This is good news for European Commission President Jean-Claude Juncker, who has repeatedly made clear that he wishes to see an extension of European powers to require a minimum wage in each country.

Although he envisages each country being free to set its own rate at first, it does not take much imagination to see that the Commission would encourage regular increases (probably irrespective of local economic conditions), with a gradual move towards a common European rate in the fullness of time.

So although the German initiative appears of little relevance to the UK at the moment, it could be the harbinger of trouble in the future.

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.