Business World

Friday 29 August 2014

Austerity alert! Germany approves €8.50 minimum wage, and it's lower than ours

Published 03/07/2014 | 15:24

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German leader Angela Merkel  Photo: Michael Sohn/AP
German leader Angela Merkel Photo: Michael Sohn/AP

Germany's lower house of parliament approved the introduction of a nationwide minimum wage of €8.50 per hour today, following months of heated debate among politicians and businesses who warned it would cost jobs.

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That compares with €8.65 in Ireland.

The law is a flagship reform of the centre-left Social Democrats (SPD), who made it a condition for entering a "grand coalition" with Chancellor Angela Merkel's conservatives last year.

The SPD has argued that a formal minimum wage is necessary to stem a yawning social divide between those in full-time jobs with full benefits and those in more informal arrangements that was spawned in part by the reforms of Merkel's predecessor, SPD chancellor Gerhard Schroeder.

"Hard-working, cheap and unprotected - that has been the reality for millions of employees in Germany. That's over now," SPD Labour Minister Andrea Nahles, who oversaw the drafting of the law, said in a speech in the Bundestag before the vote.

Opponents say the wage could threaten jobs at small firms, however, particularly those in the former East where wages are lower, and hurt the competitiveness of Europe's largest economy.

Hartmut Mertens, chief economist at Investitionsbank Berlin, said the minimum wage "will make it even more difficult for people without qualifications to find a job", while Mario Ohoven, head of a Mittelstand lobby, said the reform could become a "jobkiller by law" unless it is adjusted.

Unlike most European Union countries, Germany has in the past resisted a minimum wage partly because it is seen as political interference in wage bargaining between unions and employers. It has relied instead on collective wage deals by sector and region.

But coverage by such agreements has decreased to 59 percent of the workforce from more than 70pc in 1998, according to the Hans Boeckler Foundation, a think-tank close to the unions, and the low-pay sector has surged in the wake of Schroeder's "Agenda 2010" reforms introduced a decade ago.

Germany has been one of seven in the 28-nation European Union without a minimum wage. Britain raised its minimum wage earlier this year to £6.50 an hour to adjust for the drop in real value during the recession.

Swiss voters rejected a proposal to introduce the world's highest minimum wage - 22 Swiss francs an hour - in May.

EXEMPTIONS

Despite the arguments that split the German establishment, the public was overwhelmingly behind the idea of a minimum wage. A poll by public broadcaster ARD this week showed nine of ten Germans were in favour of it.

The new law will include more exemptions than initially envisaged, concessions which Nahles said were intended to enable a smooth transition. Some sectors will be allowed to delay introducing the wage for two years to help them adjust, and certain groups can be paid less under certain conditions.

The exemptions have prompted outrage from labour unions, who say they will hurt the weakest people in the labour market.

"With the high number of exceptions, the coalition has brutally amputated the minimum wage," Frank Bsirske, head of the influential Verdi labour union, said over the weekend.

Despite grumbling from some members of Merkel's party that the SPD has been shaping policy in her six-month-old government, there was also overwhelming support for the law in parliament.

Of the 601 votes cast, 535 lawmakers voted in favour and only five against, while 61 abstained.

The SPD has already pushed through plans to cut the pension age for long-time workers and raise pension entitlements, moves which have also raised eyebrows on the right and in business.

"The minimum wage was long due," said Carsten Brzeski, chief economist at ING, citing a growing divide between rich and poor.

"In the short term, the minimum wage will further stimulate the economy, but in the long run it could become a problem for international competitiveness."

The law requires approval from the upper house next week, but the Bundesrat has already indicated it will give its nod.

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