German minimum wage talk mostly symbolic for now

The country is one of the few in the EU without a minimum wage. Political parties agree it’s time to end that anomaly. The macroeconomic impact of the reform will be muted. Yet the debate suggests there’s a limit to Berlin’s appetite for deregulated labour markets.

Germany has been urging southern European countries to deregulate their labour markets. Meanwhile, it seems to be headed in the opposite direction. While the technical details are still up for debate, there is a consensus among all political parties that Germany needs a minimum wage at last.

Such a move would break a longstanding policy of keeping the government out of wage setting. The right to free collective bargaining is enshrined in the constitution. Even the social democrats of the SPD party and union leaders opposed government intervention in matters related to wages and pay.

In recent years the economy has taken a direction that has triggered a rethink. Welfare reforms, which have increased the pressure on workers to take up low-paid jobs, have also led to a rise in the number of working poor, which in turn has fuelled a national debate on social justice.

The SPD and the Greens are campaigning for a nationwide minimum wage of 8.50 euros an hour. By comparison, France’s current minimum stands at 9.43 euros. German Chancellor Angela Merkel is pushing instead for what she calls “salary floors”. She favours sector-specific and regionally differentiated minimum wages, set by unions and employers’ associations, rather than a national, government-imposed norm. Such rules are already in place in 12 industries. Even Merkel’s coalition partner, the free-market FDP, is warming to her idea.

That means that some form of minimum wage could see the light of day after September’s parliamentary election. The individual benefits for low-paid workers will be palpable. Around 5 million workers in Germany – some 16 percent of all employees – currently earn less than 8.50 euros an hour.

The macroeconomic impact should still be limited. Recent empirical research indicates that moderate minimum wages aren’t as bad for employment as classical economic theory suggests. On the other hand, benefits will be small as well. If employment remains stable, a minimum wage of 8.50 euros would lead to a reduction in social spending of just 0.3 percent of GDP, according to one estimate. German household incomes would rise 1.1 percent. Any boost to German domestic demand is welcome, but this would hardly be a game changer

The most important message may be a broader one. Even in Germany – Europe’s stalwart of structural reforms – the appetite for unbridled labour markets has limits.

This article was initially  published as a Reuters Breakingviews comment on 02 April 2013.

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