Germany: A national minimum wage for Germany?

A heated debate is under way in Germany on the advantages and disadvantages of putting into place some form of system to guarantee minimum rates for workers. The arguments are complex and multi-faceted, but many people take the view that the country could benefit from some kind of minimum wage system. A government commission briefed to look into the issue of low pay will report in the autumn. We review the main areas under discussion.

The context

The past few weeks have seen a lively debate among Germany's politicians on the subject of low pay and the possibility of introducing some kind of national minimum wage. This was the focus of intense discussion among Germany's trade unions during 2004 (see Germany: Debate on minimum wage). The debate tailed off at the end of that year for a while, but was revived in 2005 following EU enlargement and concerns about how to prevent an influx of cheaper labour from some of the new EU member states, which could undermine the German labour market.

A key element of the debate is the form that any kind of low-pay guarantee should take. At present, minimum rates of pay are set by sectoral collective agreement, which works well if the majority of employers are members of the signatory employers' organisation and therefore covered by the agreement. However, this breaks down if many employers are not, which is increasingly the case in the east of the country, but also in some sectors that are dominated by small firms, such as the restaurant, hotel and catering sectors. One option would be a statutory national minimum wage, set by the government and covering the whole country, as is the case in many EU member states. The UK and Ireland were the most recent converts to this system. Another option would be to extend a sectorally agreed minimum rate across a whole sector, so that it would cover all employers in that sector, whether or not they were members of a sectoral-level employers' organisation. Under more recent thinking in Germany, instead of a minimum wage, some form of combined system could be put into place, under which low pay could be topped up by state subsidy.

The German labour market reforms of the past few years (see Germany: Reforms to boost labour market) have introduced a range of new measures designed to help people gain access to the labour market and move people off benefits and into work. These include cuts in unemployment benefit (the replacement of a former earnings-related benefit with a flat-rate benefit), encouraging people to set up their own business, regulating so-called "mini-jobs", which are largely domestic tasks carried out in private households, and so-called "one euro jobs", under which a long-term unemployed person engages in "socially useful work", such as tidying parks or public spaces, and is paid either one or two euros an hour by the state, on top of unemployment benefit. These measures will be reviewed in the medium term, to see if they are performing as intended and any debate on the possibility of a minimum wage system would need to take these measures into account.

Chronology of developments

A debate on the possibility of introducing some kind of minimum wage system was held during 2004 and 2005. At the time, the then government of Social Democrats and Greens took the view that the social partners should try to agree on the way forward, but if they could not, the government would take action. As no social partner consensus was reached, in May 2005 the government drafted legislation designed to extend existing legislation governing posted workers (which applied only to the construction and related trades sectors) across the whole German economy (see Germany: High unemployment and pay moderation define labour market). However, it was clear that the future of this draft legislation would depend on the government that came into power after the September 2005 general election, as the CSU and CDU Christian Democrat parties, which were at that time in opposition, were against this proposal. In effect, a new coalition government took office in October 2005 - the "grand coalition" of Social Democrats and Christian Democrats - and the legislation has not progressed.

Nevertheless, in the policy programme for its coming term of office, issued in autumn 2005 (see Germany: New government sets out policies to create employment), the new government included a section on low pay. In this, it notes that almost 2 million people, or 39% of unemployed people in Germany, have low skills levels or no vocational qualifications, meaning that they find it difficult to enter the labour market. To this end, a government commission, led by the Social Democrat labour minister and vice chancellor, Franz Müntefering, will work on this issue, looking at existing mechanisms to support low-paid workers. The commission is due to report on its findings in autumn 2006.

Although this commission will make no concrete recommendations until autumn 2006, the issue of low pay surfaced once more at the beginning of 2006, in advance of a special two-day meeting of the members of the German government. This meeting was held on 9 and 10 January 2006, to debate a range of measures aimed at boosting growth and jobs. The meeting also debated the possibility of introducing a new system to subsidise pay for long-term unemployed people. Under such a system, known as a "combined wage" system (Kombilohn), a wage would be paid by the employer and topped up to a minimum level by state subsidy.

Political views on combined wage systems and a minimum wage

In general, the Social Democrat party (SPD) is in favour of introducing some form of minimum wage system, but the other coalition partners (the Christian Democrat party CDU and its Bavarian sister party CSU) have been, on the whole, sceptical.

However, the president of the state of Lower Saxony, Christian Wulff (CDU), intends to introduce a combined wage system on an experimental basis in the states of Lower Saxony from summer 2006. This pilot scheme is due to begin on 1 July 2006, with the state subsidising gross pay of up to €1,500 a month.

Ahead of the government's meeting, politicians of all political hues made their opinions public. The finance minister Michael Glos (CSU) has recently proposed putting into place a series of pilot combined wage projects across the country, in addition to the pilot project in Lower Saxony .

However, in an interview given to the German business weekly Der Spiegel in early January, Chancellor Angela Merkel stated her belief that putting in place temporary pilot schemes is not the answer. She maintains that such schemes are not capable of giving reliable data on trends. She also linked the issue of some form of combined wage scheme to the idea of a minimum wage, arguing that people who want a combined wage system must also be prepared to countenance some form of minimum wage: "We must not allow a situation to develop in which jobs in Germany are offered at the rate of €0.50 an hour, with the rest of the wage financed by the tax payer. Our main aim is to create jobs rather than to put into place some sort of self-service arrangement for employers who know how to work the system." She also noted that there are potential problems in this for collective bargaining: "It would not be acceptable for collectively agreed rates to be lowered in order to allow workers to benefit from state financial subsidies." Other ministers, from the Social Democrat as well as the Christian Democrat side, have expressed their fears about the possibility of a "bottomless pit" of financial responsibility for the state.

Frank-Jürgen Weise, head of the Federal Employment Agency (Bundesagentur für Arbeit), has said that some success has been had with short-term combined wage schemes, although people must not set their hopes too high as it is not a cure-all formula. However, he stressed that it can be an effective way of helping long-term unemployed people gain access to the labour market: "80% of people participating in such schemes have kept their job after the particular subsidy scheme has expired."

The Green party, which does not form part of the present coalition, but held power with the Social Democrats until September 2005, is arguing for a reduction in non-wage labour costs rather than the introduction of a combined wage model, maintaining that this would create 600,000 jobs in the medium term. The left-wing parliamentary party (Linke.PDS) supports the introduction of a statutory minimum wage.

Despite the differences of opinion, often within political parties, both the Social Democrats and the Christian Democrats have expressed a willingness to work together on this issue and to find a compromise if possible. Volker Kauder, head of the parliamentary CDU/CSU party, has stated that if some kind of combined wage system involving public funding is financially viable, and if this system actually helps people find work, then the CDU/CSU would be in favour of it.

Interface with the social benefit system

The Munich-based social research institute, the Ifo Institute, is reported to be working on a paper in which it discusses how low-pay measures should interact with the present social benefit system. The institute is in favour of advising that secondary unemployment benefit (Arbeitslosengeld II) - which is a flat-rate payment, paid if a person has no entitlement to primary unemployment benefit or their entitlement to this has expired - should be reduced by 30% if an unemployed person is not engaged in any type of work that is of use to the community.

Nevertheless, many politicians in the CDU and CSU have expressed reservations about introducing an across-the-board reduction in unemployment benefit as a means of increasing employment, even though this would be cheaper than using a combined wage model. It would be a politically controversial step, particularly given the protests that accompanied the introduction of this flat-rate benefit in 2004, when it replaced a former earnings-related benefit. Commentators also point out that the approach of lowering benefit to encourage people to work is predicated on the existence of available jobs, which may not be the case in some parts of the country, notably the east. Ifo's proposal is also likely to lead to the creation of a larger low-wage sector.

Business and employer views

The business community is against the introduction of any kind of system that would mean an extra financial burden on companies. Ludwig Georg Braun, president of the German chamber of industry and commerce (DIHT), warned that a statutory minimum wage could result in increased bureaucracy and costs for employers. He also stated that any combined wage systems that provided for an income at a level above the current flat-rate secondary unemployment benefit would be too expensive.

Negative comments have also come from the director of the Hamburg-based institute for the world economy, Thomas Straubhaar, who maintains that a minimum wage would be "an economic catastrophe" for Germany and that the consequence would be job losses.

The Ifo Institute agrees, stating that "if wages are set by legislation, this will result in pay rates that are too high".

Union views

There are diverse union views on this issues. Some unions are very much in favour of the introduction of a statutory national minimum wage. For example, the food, tourism and catering union NGG has been campaigning for it since the late 1990s. This union's members work in traditionally low-paid sectors and would almost certainly benefit from a new statutory minimum.

Germany's largest trade union, ver.di, is also in favour of a statutory national minimum wage, and has suggested a rate of €7.50 an hour. The metalworking union IG Metall would favour a system involving the extension across a whole sector of a sectorally agreed minimum rate, as is at present the case in the construction and related industries (see below for details of the current rates).

By contrast, the chemical workers' union and the construction workers' union have doubts about a statutory national minimum, fearing that it could undermine collective bargaining and weaken the position of trade unions.

The German trade union confederation DGB is in favour of the introduction of some form of minimum wage system. Ursula Engelen-Kefer, deputy head of the DGB, recently told the German business daily Handelsblatt that: "Given the present existence of a sizeable and growing low-wage sector, it is necessary to draw a line under wages." She added, however, that it was the responsibility of the social partners to determine minimum rates: "Collective bargaining autonomy is one of our highest priorities. We would also be in favour of the extension of the posted workers' legislation to ensure that minimum rates are properly in force in all sectors of the economy."

The DGB is not in favour of introducing a national statutory minimum wage, although Engelen-Kefer has said that this would be the best way forward in sectors where there are no employer organisations and therefore no sector-level bargaining partners for trade unions.

The next steps

As had been widely expected, the special two-day meeting of government ministers in January 2006 did not result in any concrete outcome on the issue of low pay and minimum wages. Chancellor Merkel admitted that there were still "widely differing views on this issue between the coalition parties". Ministers agreed to await the outcome of the government working group that is looking at the issue. Specifically, this group has been briefed to examine ways of increasing employment for people with low skills levels. Ministers did agree that any measures taken must not "depress wages to unacceptably low levels".

However, after a few weeks of respite, the discussion heated up again in early February, with signs that resistance within the CDU/CSU to some form of minimum wage system may be crumbling. The line of thought here follows the argument outlined by Chancellor Merkel in January, namely that there are dangers attached to introducing a combined wage system, in the form of an unacceptably high financial burden on the state, particularly if employers reduce their wages to take advantage of state wage subsidy. In addition, if actual wages were reduced so much that the recipient received only as much as unemployment benefit, the measure would have no job-creating value.

CDU/CSU members of a working group looking into this issue have stated that they intend, by the early summer of this year, to draft a framework on how to reform the low pay sector. Nevertheless, although the CDU/CSU is clearly open to having a frank debate on the issue of low pay, it is clear that there remains resistance to the idea of a statutory minimum wage, with finance minister Glos stating recently that this would counteract the government's aim of providing normal work to as many people as possible who have difficulty gaining access to the labour market.

Many SPD politicians remain in favour of the introduction of a national minimum wage. SPD head Matthias Platzeck has recently returned from a visit to London , after which he noted that the national minimum wage in the UK , a relatively recent phenomenon dating from 1999, has helped those on low wages and does not appear to have damaged the UK economy.

Much will depend on the findings of the government commission on low pay, which will report this autumn. SPD labour minister Franz Müntefering has stated that he would like to put forward a proposal on a minimum wage system in the autumn, after the government commission has released its findings. This debate clearly has many more months to run, but the outcome could be very interesting in terms of German social policy - it may well be that, after hearing all the arguments, the government decides to put in place some form of system to ensure the maintenance of minimum pay rates, which would be a great innovation in the German context.

Existing sectoral minima

A minimum wage already exists in some sectors in Germany . Collectively agreed minimum rates have been extended across the entire sector in the construction industry, the painting and varnishing sector, the roofing sector and the commercial cleaning sector. This ensures that a minimum level of pay can be enforced in sectors that can be difficult to police. Different rates apply to the east and the west. For details of the rates in force, see the table below.