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  Letter from Berlin: In Minimum Wage Debate, Germany Should Look Abroad

Letter from Berlin In Minimum Wage Debate, Germany Should Look Abroad

By Frank Hornig, Michael Sauga and Stefan Simons

The German government is currently deeply divided by a proposal by the left-leaning Social Democrats to introduce minimum wages across all economic sectors. The concept, though, has long been commonplace in the United States and other parts of Europe -- with mixed results.

When it comes to shaping their pro or con arguments over whether the country should adopt a minimum wage, it doesn't take long for the experts debating the issue in the German government to start looking beyond the country's borders.

A clear majority of industrialized countries have already introduced some form of a minimum wage -- from business-friendly Estonia to public sector-dominated Greece -- but the results have been far from uniform. Indeed, the results in these countries have differed greatly and don't always serve as benchmarks for an economy as large and complex as that of Germany's.

"Experiences in other countries show that a minimum wage does not eliminate any jobs," says Labor Minister Olaf Scholz of the left-leaning Social Democratic Party (SPD). His party is pushing for minimum wages that would vary by sector in order to attract voters who have recently been defecting to political parties further to the left. But the international comparison, argues Economics Minister Michael Glos -- a member of the conservative Christian Social Union, the Bavarian sister party of Chancellor Angela Merkel's Christian Democrats -- demonstrates that "the government is not the right party to regulate wages."

So, who's right? The SPD has defined the minimum wage as the dominant issue in its current campaigns ahead of forthcoming German state elections. Earlier this month Scholz presented a concrete proposal for minimum wages across the board. On the other side of the political spectrum, conservative politicians are painting the debate as part of what they claim is a looming battle over what CSU Chairman Erwin Huber calls "freedom or socialism."

A recent study by the Organization of Economic Cooperation and Development (OECD) concluded that in some countries the minimum wage proved to be part of a "coherent strategy to boost employment and fight poverty." The study also noted that minimum wage initiatives have been less than successful in other countries: In some cases it's been harmful to the labor market, and in others, it has provoked social conflict.

International comparisons suggest yet another uncomfortable conclusion. The minimum wage turns out to be least beneficial to those who are cheering for it most loudly in Germany: the unions.

But even with these conflicting international findings, a growing number of experts appear to be less concerned about whether they should be introduced in Germany than about how. Joachim Möller, the head of the research institute of the Nuremberg-based Federal Labor Office, which manages labor issues and unemployment benefits in Germany, says the key issue is to determine the critical level at which "a minimum wage is detrimental to employment." If the minimum wage is lower than this level, he says, it will produce few benefits for those affected by it. But if the government sets the wage threshold too high, it could cost the economy hundreds of thousands of jobs.

America's Working Poor

The United States' experience with the minimum wage -- raised in July 2007 to $5.85 an hour after being motionless for a decade -- reveals what happens when it is set so low that it can't provide a minimum standard of living. When adjusted for inflation, the 2006 minimum wage was nearly 30 percent lower than it was in 1979.

The US version of a government-guaranteed wage only helped to widen the gap between rich and poor. While the incomes of the top 1 percent of US breadwinners grew rapidly, increasing numbers of Americans were plunged into poverty. Today, more than 12 percent of Americans live below the poverty line -- meaning they earn less than an annual income of roughly $20,000 for a family of four.

The 1990s job-creation miracle in the US, which magically produced millions of new positions, came at a high price. The so-called "working poor," people who work but live in poverty nonetheless, have long constituted a fixed variable in the US economy. Many of them even earn less than the minimum wage, as a recent strike by New York City restaurant delivery workers revealed.

Twenty-two of the striking workers were fired last year by the Saigon Grill after they filed a suit against the restaurant for paying them an hourly wage of $1.60. "The conditions are pretty bad in all restaurants," claims one of the workers, Yu Guan Ke, who says he earned an average of $120, tips included, for a 75-hour workweek. Ke had delivered takeout orders for the Vietnamese restaurant for 10 years. If customers complained about a late food delivery, the workers were forced to pay a $200 penalty. The fine for accidentally slamming the door to the restaurant was $50.

Because of conditions like these, not even President George W. Bush and his Republican party dared to obstruct the most recent increase in the minimum wage. The Fair Minimum Wage Act, introduced by the Democrats, will increase the minimum wage -- for the first time since 1997 -- in three steps, from $5.15 before the most recent increase, to $7.25 an hour in 2009.

But a government's mandating an increase in a minimum wage deemed too low tends to be the exception rather than the rule. More often than not -- in France, for example -- the opposite is the case.

Très Expensive

The French minimum wage is now so high that even those of the card-carrying left, like former Socialist Finance Minister Dominique Strauss-Kahn, consider it harmful. The French version of the minimum wage, known as the Guaranteed Minimum Salary, has existed for more than half-century. It was originally tied to a consumer price index, but starting in 1970 wage inflation was also taken into consideration.

The French government has also been known to beef up the minimum salary when it proves to be politically expedient. President Georges Pompidou, a Gaullist, introduced the most generous increase -- 12 percent, in 1973 -- in an effort to bridge the "social gap" between the rich and the poor. Socialist President Francois Mitterrand blessed French workers with a hefty 10-percent increase in 1981. And in July 2004, conservative President Jacques Chirac added a healthy 6 percent to the guaranteed minimum salary level. Nicolas Sarkozy served as economics minister at the time.

Now, in his new role as president, Sarkozy is suddenly finding fault with what he calls the "negative side-effects." For years, the government-mandated minimum wage grew at a faster pace than average salaries. This turned increasing numbers of French workers into minimum wage recipients -- now accounting for 17 percent of the total workforce, the highest level in Europe.

Meanwhile, the difference between the minimum wage and the lowest wage levels negotiated with the unions is so small that many companies are reluctant to hire new workers. "For the trade businesses, small businesses or families that just need a cleaning woman, a minimum wage of just below €8.50 ($12.50) an hour is too high," says Jean-Michel Dizien, a Paris-based expert on labor law.

Many experts hold the French version of the minimum wage responsible for higher unemployment in France than in neighboring countries, especially among young people and unskilled workers. A program that was originally intended to reduce poverty has in fact become the root cause of the misery and hopelessness that pervades the poor suburbs of many French cities.

Even many labor representatives now see France's minimum wage system as a model not to be emulated. If the minimum wage were mandated the way it is in France, says Reiner Hoffmann, deputy general secretary of the European Trade Union Confederation, the unions would "lose influence in collective bargaining policy."