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The German Minimum Wage Act: An Opportunity Missed?

After the Christmas festivities and New Year’s celebrations had subsided, those returning to work in Germany this month were, for the first time, the beneficiaries of a statutory minimum wage. Prior to 1st January, collective agreements reached at sectoral level provided a functional equivalent (along with specific statutory minimum wages set in some Länder). However, low collective bargaining coverage, estimated at 58 per cent of all workers, had contributed to a situation were a significant proportion of the workforce were not afforded the protection of a wage floor. Coupled with the growth in precarious forms of employment, in particular ‘mini jobs’, a coalition agreement reached after parliamentary elections in September 2013 outlined the terms for the introduction of the ‘Mindestlohngesetz’ (the German Act on the Regulation of a Minimum Wage, the ‘Minimum Wage Act’). As a part of a broader reform package intended to strengthen collective bargaining, trade unions have been enthusiastic about its introduction. Certain features of the Minimum Wage Act remain open to question though, especially when compared to systems in other countries.

In absolute terms, at €8.50 per hour, the German minimum wage has been set at a similar level to statutory minimum wages in the UK, the Netherlands and France. When measured as a proportion of the median national wage, Germany’s minimum wage sits in the top half of comparable European states. In this regard, competition is not stiff; France leads the way at 60 per cent, whilst Germany lags behind at 51 per cent. As such, the German minimum wage is considerably lower than the threshold for a low wage and the levels called for in national ‘living wage’ campaigns (a low wage is a wage below two thirds of the national median wage). Introduction at such a low level has been defended as a pro-business measure, allowing for a period of transition. In the UK, the ‘adult’ minimum wage has increased by 80 per cent since its introduction in 1999. In its haste to institute the Minimum Wage Act, the Federal Ministry of Labor and Social Affairs has wasted a prime opportunity to set a meaningful wage floor for millions of workers.

Little comfort can be taken from the procedure for adjustment under the Minimum Wage Act. In theory, periodic increases are to be overseen by the ‘Minimum Wage Commission’ (the ‘Commission’). But in practice, serious flaws with this system call into question the ability of the German minimum wage to end in-work poverty and boost aggregate demand (two of the main objectives discussed during debates concerning its introduction). The Commission is charged with carrying out an evaluation of the minimum wage every two years, which is to be undertaken for the first time before 30th June 2016. When considering increasing its level, the Commission is to assess whether doing so is “likely to contribute to an adequate minimum protection of employees, facilitate fair and functioning competition and not to jeopardize employment”. This task is made all the more difficult for having to balance the interests of both sides of industry. At the appointment of the federal government, a chair, three employers’ association representatives, three trade union representatives and two scientific advisors (invited at the request of the social partners but without voting rights), are to decide by majority whether the minimum wage should be increased or kept at the same level as in the previous two year period. Consequently, the chair’s vote is decisive if consensus cannot be reached.

In an attempt to ensure fairness, the chair is to be chosen by the employers’ and employees’ side together. Failing agreement, a chair selected by each will hold office on a rotating basis (for two years). In the event of an alternate chair, which given the prevalence of integrative or conflictual forms of collective bargaining in Germany is highly likely, tit-for-tat increases and stasis in the level of the minimum wage can be expected. By failing to account for the considerable differences in power between capital and labour, the Commission system institutionalises the trend of limited increases in collectively agreed wages seen over the last twenty years. A scenario can be envisaged whereby the minimum wage will be increased only every four years and only by an amount politically acceptable to the employers’ associations; it is difficult to imagine them refusing a negligible increase and undermining a system that is heavily weighted in their favour. For a social democrat, the absence of the state’s guiding hand is worrying, moreover, for those in Europe used to corporatism it is sacrilege. Without the so-called ‘shadow of the law’, embodied in the attitude “if you can’t agree, we’ll intervene”, even very small concessions are highly unlikely.

This is recognised as a serious problem with negotiation based models of adjustment. For all the rhetoric of providing a forum where industrial democracy can be practiced, the best that can be achieved is a form of collective bargaining ‘lite’; impotent for not allowing the exercise of industrial action by way of strikes. The experience of other countries appears to have been ignored in the design of the Commission system or, rather, high-mindedly disregarded. There is no doubt the UK Low Pay Commission was influential, indeed, within academic circles it is considered somewhat of a pinup. But as an advisory body, its recommendations can be ignored and unilateral action taken by the government. A spur for both sides of industry to reach agreement is to supplement negotiation (e.g. Germany) or consultation (e.g. the UK) based models of adjustment with indexation. In European states with the highest relative minimum wages (Luxembourg, France, the Netherlands), automatic indexation to price and/or wage developments ensures the state retains a ‘nudge’ towards agreement. Often this is enhanced by scheduling increases to coincide with wage bargaining rounds, using the minimum wage as a ‘starting point’.

Given the ideological and structural differences between Germany and its European neighbours, diversity in minimum wage setting institutions is to be expected. A lack of direction though has robbed Germany of a system that can deliver now and in the future. Attempting to retain the low wage labour required for its export-oriented growth strategy, whilst establishing a safety net to protect the very same workers, was always going to be difficult. At the same time, insufficient consideration was given to the huge differences in pay between the East and West. Of course, there are positives: including the limited use of sub-minima (e.g. for disabled workers); amongst the highest financial penalties for non-compliance in Europe (up to €500,000); and plans for further, supportive legislation (e.g. The German Act on Temporary Agency Work). However, the opportunity for abuse by employers remains a major concern, not least because €8.50 per hour is low and the procedure for adjustment susceptible to ‘regulatory capture’. As the most powerful member of the Eurozone, Germany’s progress will be watched closely. Beyond domestic analysis, debates on the idea of a European Union minimum wage policy are already receiving more attention than ever before. What will become clear with time is that the German minimum wage is not the Christmas present many had been hoping for.

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