Is the minimum wage too low?

Minimum wage of 12 euros: implications and prospects

More than four years after its introduction, the statutory minimum wage is widely accepted in Germany as an instrument of wage regulation in the low-wage sector. This is not least due to the fact that the often forecast negative effects on employment have not materialized.1 At the same time, however, there are increasing voices pointing out that one of the fundamental goals of the minimum wage has still not been achieved, namely ensuring a poverty-proof, livelihood wage Wage level that enables at least a full-time single household to make a living without additional supplementary benefits.2 Studies have shown that, particularly in many major German cities, a significantly higher minimum wage would be necessary in order to achieve an income above the supplementary threshold.3 This applies even more if not only single households, but also other types of households such as B. Single parents are included in the analysis. After all, the current minimum wage is far from enabling a pension entitlement above the basic security even with continuous full-time employment. According to calculations by the Federal Ministry of Labor, an average working time of 38.5 hours per week and 45 contribution years would currently require a minimum wage of 12.63 euros per hour.4 Other studies assume even higher amounts

This makes it clear that, unlike in the Minimum Wage Act, the minimum wage in Germany is not yet a “living wage” that enables “adequate minimum protection” in the sense of an existence and social participation independent of further state transfers. On the contrary, the extremely low Kaitz index of the German minimum wage, which, according to OECD calculations in 2017, was just under 48% of the median wage for full-time employees, 6 indicates that we should rather speak of a poverty wage. Although the introduction of the minimum wage in the lower wage segment has led to above-average wage increases, the low-wage sector in Germany has not shrunk overall, but remains at one of the highest levels in Europe

illustration 1
Share of employees in the wage segment below and above 12 euros, 2017

Source: own calculation based on the SOEP wave 2017 (total employees, employees in collective bargaining companies, collective bargaining coverage) and PASS wave 2017 (activity in a union).

Against this background, there are currently increasing voices in favor of a significantly stronger increase in the minimum wage in Germany to a poverty-proof and livelihood-securing level. A minimum wage of 12 euros per hour seems to be establishing itself more and more as the new target norm. After the party Die Linke8 had already made a corresponding demand in the Bundestag in 2017, the SPD9 is now officially in favor of a "perspective increase" of the minimum wage to 12 euros. The parties find broad support among the population, 80% of whom, according to Infratest dimap, would welcome such an increase in the minimum wage.10 The demand has meanwhile also found broad support in the trade unions.11 However, a certain reserve remains here because it is strong A minimum wage increase would interfere with the existing structure of collective agreements. There are still wage groups below 12 euros in many collective agreements, and there is concern that if the minimum wage is correspondingly high, individual employers will completely abandon the collective bargaining agreement.

The range of a minimum wage of 12 euros

In order to estimate how many employees in Germany currently earn less than 12 euros per hour, the Socio-Economic Panel (SOEP) and the Earnings Survey (VE) of the Federal Statistical Office are evaluating two data sets for which current data from 2017 is available . The SOEP is an annual survey of around 30,000 people, while VE 2017 evaluated the information from more than 8,000 companies that took part in the survey on a voluntary basis. In the SOEP, hourly wages were calculated on the basis of information on monthly income, contractual working hours and paid overtime. The calculations carried out by the Federal Statistical Office were adopted for the VE. 12

On the basis of the data sources mentioned, between almost 9 million (SOEP) and 11 million (VE) employees worked at an hourly wage of less than 12 euros (see Table 1). This corresponds to between 27% and 30% of all dependent employees in Germany. The relatively large differences between the two data sources result mainly from the fact that many marginally employed persons do not provide any information on their contractual working hours in the SOEP and are therefore clearly underrepresented in the SOEP analysis used. Without these differences, the information from both data sources is relatively close, so that the total number of employees with hourly wages of less than 12 euros is more likely to be around the 11 million employees reported by the VE.

Table 1
Employees1 with an hourly wage below 12 euros, 2017
 Socio-Economic Panel (SOEP)Earnings Survey (VE)
Full time3 567 000203 648 67116
Part time3 164 000273 272 59335
slightly1 946 000874 113 84679
Women5 331 000356 385 04736
Men3 345 000204 650 06324
a total of8 676 0002711 035 11030

1 Excluding apprentices, interns and employees under 18 years of age.

2 In% of the respective employee group.

Sources: SOEP wave 2017: own calculation; Conversion into hourly wages based on the contractual working hours and paid overtime. Full-time = average weekly working time of 37.7 hours according to the collective agreement; Earnings survey 2017: calculation by the Federal Statistical Office.

The evaluations also confirm the picture known from many studies, according to which the average hourly wages of part-time employees subject to social security contributions are significantly lower than that of full-time employees and the average hourly wages of marginal part-time employees are again significantly lower. Accordingly, the proportion of full-time employees with hourly wages below EUR 12 is only between 16% and 20%, compared with 27% to 35% for part-time employees subject to social insurance and 79% to 87% for marginal part-time employees. Finally, it is once again evident that the low-wage sector in Germany has a clear gender bias. While around 35% or 36% of all women work for an hourly wage of less than 12 euros, the figure for men is only between 20% and 24%.

An increase in the minimum wage to 12 euros per hour, from which between 9 million and 11 million employees would have benefited directly in 2017, would once again intervene much more strongly in the existing wage structure than the introduction of the minimum wage in 2015, which immediately resulted in around 4 million Employees were affected.13 The latter represented around 11% of employees compared to 27% to 30% whose wages would have had to be increased in 2017 if the minimum wage had been increased to 12 euros. On average, the hourly wage would have risen by 2.87 euros.14 Between 2014 and 2016, hourly minimum wages rose by around 14%. In East Germany the increase was more than 20% .15 If the statutory minimum wage were to be increased in one fell swoop from the current EUR 9.19 to EUR 12 per hour, this would correspond to an increase of around 30%. With an increase from 2020 onwards from the then existing minimum wage of 9.35 euros, it would still be 28%.

Relationship between minimum wage and collective agreement system

An increase in the minimum wage to 12 euros would also have a significant impact on the existing collective bargaining system in Germany. According to a current study based on an evaluation of more than 40 collective bargaining sectors with more than three quarters of all collective bargaining employees, around a fifth of all wage groups in collective agreements were below EUR 12 at the beginning of 2019. In comparison, the share of collectively agreed wage groups below the minimum wage when it was introduced in 2015 was only slightly more than 6%. In many collective agreements, an increase in the lower wage groups to the level of the minimum wage was anticipated even before its official introduction. 16

Since employees in companies that are bound by collective bargaining agreements generally earn significantly more than those of employers who are not bound by collective bargaining agreements, the proportion of employees with hourly wages below EUR 12 is around 16% lower than in the group of all employees, in which 27% are less than EUR 12 earn (see Figure 1). Accordingly, in the wage segment below 12 euros, only a third of the employees are bound by collective bargaining agreements, while in the wage segment above 12 euros the wage coverage is still almost 60%.

The very low level of collective bargaining coverage in the low-wage sector once again underlines the importance of the statutory minimum wage, as otherwise the employees concerned would be provided with no wage protection whatsoever. The low level of collective bargaining coverage in the low-wage sector is also an expression of the extremely low level of union membership in the sectors concerned. In the context of the panel survey “Labor Market and Social Security” (PASS) carried out by the Institute for Employment Research (IAB), in which around 10,000 households are surveyed annually, only 4% of employees with hourly wages of less than 12 euros stated in 2017 that to be active in a union. In the case of employees with hourly wages of EUR 12 or more, it was still 13% .17 The low-wage sector is particularly difficult for the trade unions to organize, as the workers concerned often have precarious employment relationships in several respects, with often marginal and irregular working hours, fixed-term employment contracts and high employee turnover. In addition, in many typical low-wage sectors such as B. the catering, hairdressing or retail very small business structures prevail, which make union organization efforts even more difficult.

The low level of union membership in the low-wage sector not only has an impact on collective bargaining coverage, it also means that where collective agreements exist, the union may not have the power to achieve higher wage increases. Accordingly, there are a number of industries in which the lower wage groups are close to the minimum wage. Experience to date shows that the introduction and adjustment of the minimum wage in some sectors has led to above-average increases in collectively agreed wages with considerable compression effects on the wage structure.18 However, no negative effects of the minimum wage on the collective bargaining agreement have yet been ascertained.

In view of the low level of collective bargaining coverage and the low level of union membership, it is unlikely that the low-wage sector in Germany can currently be limited without a greater increase in the minimum wage. An increase to 12 euros would lead to a systematic revaluation of individual sectors and help to raise certain collectively agreed wage structures to a poverty-proof and livelihood-securing level. A loss of collective bargaining coverage in the course of the minimum wage increase in some weakly organized areas could not be ruled out in every case. Conversely, however, the elimination of downward wage competition and the compression of the wage structure could also create new conditions for building new wage structures above the minimum wage for qualified employees. The demographic development and the growing shortage of skilled workers are more likely to support this process.

Effects of a stronger minimum wage adjustment

Theoretically, it is impossible to predict in advance what effects an increase in the minimum wage to 12 euros would ultimately have on employment in Germany. After many studies on the possible employment effects before the introduction of the minimum wage turned out to be blatantly incorrect forecasts, the economic debate in this regard is now much more cautious. Nonetheless, many assessments are based on the so-called “tipping point theory”, according to which the previously neutral effects of the minimum wage on employment turn into negative at a certain level, although this tipping point is supposedly exceeded at 12 euros.19 On the other hand, it can be argued that In the case of the minimum wage, it is not the absolute amount that matters, but the respective wage-price ratio. The Scandinavian countries are z. B. for a model that is characterized by a significantly lower wage spread, a much smaller low-wage sector, comparatively very high (collectively agreed) minimum wages and a correspondingly high price level.20

An increase in the minimum wage to 12 euros in Germany would be associated with considerable increases in income in the lower wage segment and a corresponding expansion in private consumer demand, which would also give the companies concerned more room to set prices. However, the wage increases do not translate one-to-one into increased purchasing power, as they are partially offset by declining transfers and top-up payments. In order to avoid possible frictions when adjusting to the new wage-price ratio, the increase in the minimum wage would also have to be designed in such a way that it gives companies enough time to adjust to the new minimum wage.

Further development of the procedure for adjusting the minimum wage

An increase in the minimum wage to 12 euros would take a relatively long time under the currently applicable adjustment procedure. So far, the minimum wage has been increased twice since it was introduced in 2015 and will amount to 9.35 euros from January 2020. In relation to the entire period from 2015 to 2020, this corresponds to an increase of 10% or an average annual increase of 2%. If this growth rate is extrapolated for the future, the EUR 12 threshold would not be exceeded until 2033 (see Figure 2).

Figure 2
Development of the statutory minimum wage in Germany1

1 Information as of January 1st of the respective year; from 2021: projection based on an annual increase of 2%.

Sources: own calculation.

According to the Minimum Wage Act (MiLoG), the minimum wage is adjusted every two years at the suggestion of the minimum wage commission, which has equal representation, whereby the federal government can only accept or reject this proposal, but has not yet been allowed to change it (Section 11 MiLoG). The minimum wage commission, in turn, should make its decision on the basis of an “overall consideration”. According to this, the level of the minimum wage should be suitable “to contribute to an adequate minimum level of protection for employees, to enable fair and functioning conditions of competition and not to endanger employment” (Section 9 MiLoG). The development of the collective bargaining agreement is also named as a specific reference point, on which the minimum wage adjustment should be based “afterwards” (Section 9 MiLoG).

The rules of procedure of the minimum wage commission also specify that the minimum wage should be adjusted "as a rule in accordance with the development of the rate index of the Federal Statistical Office ... in the two preceding calendar years" and that of this principle only with a two-thirds majority of those entitled to vote Members of the minimum wage commission may deviate.21 With this voting procedure, an extraordinary increase in the minimum wage to 12 euros would in principle be possible, but due to the expected veto position on the part of employers, it would in fact be virtually impossible.

The close orientation of the minimum wage to the collective agreements was originally supported by both the employers' associations and the trade unions. In this way it should be underlined that, even after the introduction of a statutory minimum wage, wage policy in Germany is still primarily determined by the parties to the collective bargaining agreement and not by the state. At the same time, it should be ensured that the adjustment of the minimum wage does not lag behind the development of collective wages. From today's perspective, however, there is the problem that the introduction of the minimum wage in 2015, at 8.50 euros at the time, was at a very low starting level. Originally, the demand for a minimum wage of 8.50 euros dates back to 2010, when it was decided at the Federal Congress of the German Trade Union Confederation at the time. After it took another five years for a corresponding minimum wage to become a reality, it had in the meantime lost a lot of its real value.

Challenges and opportunities of the minimum wage adjustment

As part of the current regular adjustment process, a structural increase in the German minimum wage to a living wage level is hardly possible.This requires an extraordinary increase by politicians, which could also take place over time in two or more steps in view of the target of 12 euros.22 What would be important here is a binding and transparent implementation plan that gives companies enough space for appropriate adjustment measures gives.

In view of the evaluation of the Minimum Wage Act planned for 2020, there is an opportunity to further develop the current adjustment procedure. In principle, the orientation towards the development of collective wages should be retained. However, it would make sense to shorten the adjustment rhythm from two years to one year so that the respective deficit between the minimum wage and the collectively agreed wages does not become too great. In addition, it should be included as a further criterion that the minimum wage reaches a poverty-proof and living wage level.23 A pragmatic target value for such a living wage criterion could be a minimum wage that is at least 60% of the national median wage for full-time employees, such as this is currently also demanded in the debate about a European minimum wage policy. 24

  • 1 J. Zilius, O. Bruttel: Effects of the statutory minimum wage - balance sheet after almost four years, in: Wirtschaftsdienst, 98th Jg. (2018), no. 10, pp. 711-717, https: //archiv.wirtschaftsdienst. eu / year / 2018/10 / impact-of-the-statutory-minimum-wage-balance-sheet-after-almost-four-years / (6.5.2019).
  • 2 The corresponding objective can be found explicitly in the justification for the Minimum Wage Act, Bundestag printed paper, No. 18/1558 of May 28, 2014, p. 26 ff.
  • 3 A. Herzog-Stein, M. Lübker, T. Pusch, T. Schulten, A. Watt: The minimum wage: previous effects and future adjustment. Joint statement by IMK and WSI on the occasion of the written hearing of the Minimum Wage Commission, WSI Policy Brief, No. 24/2018, Düsseldorf.
  • 4 Federal Ministry of Labor and Social Affairs: Answer to the written question from the Bundestag member Susanne Ferschl (Die Linke), job number 377, May 7, 2018.
  • 5 F. Blank: The pension level under discussion, WSI-Policy Brief, No. 13/2017, Düsseldorf.
  • 6 T. Schulten, M. Lübker: WSI Minimum Wage Report 2019. Time for strong wage increases and a European minimum wage policy, WSI Report, No. 46/2019.
  • 7 M. Grabka, C. Schröder: The low-wage sector in Germany is larger than previously assumed, in: DIW weekly report, No. 14/2019, pp. 250-257.
  • 8 Die Linke: Ensure a poverty-proof statutory minimum wage, Bundestag printed paper, No. 18/11599 of March 21, 2017.
  • 9 SPD: Work - Solidarity - Humanity. A new welfare state for a new era, February 10, 2019.
  • 10 Infratest dimap: ARD Germany Trend, Berlin, February 2019, p. 3.
  • 11 R. Hoffmann: If the hairdresser earns more, the cut will be more expensive, Zeit Online from December 26, 2018; F. Bsirske: A minimum wage of twelve euros is set, Stuttgarter Nachrichten of March 27, 2019.
  • 12 Federal Statistical Office: Earnings Survey 2017, Results Report, Federal Ministry of Labor and Social Affairs (Ed.), Research Report, No. 510, June 2018. The authors thank the Federal Statistical Office for calculating the number of employees with an hourly wage of less than 12 euros on the Basis of VE 2017.
  • 13 Minimum Wage Commission: Second report on the effects of the statutory minimum wage, Berlin 2018, p. 52.
  • 14 Calculation based on SOEP 2017.
  • 15 Ibid, p. 50.
  • 16 T. Schulten: WSI Low Wage Monitoring 2019 - Development of collectively agreed remuneration groups in the low wage area, WSI tariff archive, elements of qualitative tariff policy, No. 86, Düsseldorf, May 2019, to be published.
  • 17 The PASS survey asks literally about “activity in the union”. This does not have to be the same as membership in a union. The union density is likely to be a little higher. The official membership figures of the trade unions result in a net degree of organization of 15% for 2017, see H. Dribbusch, P. Birke: Unions in Deutschland, study by the Friedrich-Ebert-Stiftung, Berlin 2019, p. 12.
  • 18 R. Bispinck: Minimum wages and collective bargaining policy - results of the WSI low wage monitoring, in: WSI-Mitteilungen, No. 7/2017, pp. 823-832; H. Lesch: Minimum wage and collective bargaining: The view of employers in affected industries, IW Report, No. 13/2017, Cologne.
  • 19 M. Köppl-Turyna, M. Christl, D. Kucsera: Employment effects of minimum wages: The dose makes the poison, in: ifo Schnelldienst, 72nd year (2019), no. 2, pp. 40-44.
  • 20 R. E. Lipsey, B. Swedenborg: Product price differences across countries: determinants and effects, in: Review of World Economics, 146th Jg. (2010), no. 3, pp. 415-435.
  • 21 Minimum Wage Commission: Rules of Procedure of January 27, 2016, Section 3, Paragraphs 1 and 2.
  • 22 So z. B. the proposal of the Verdi chairman: F. Bsirske, a. a. O.
  • 23 A similar proposal can be found e.g. B. in Bündnis 90 / Die Grünen: Increase the minimum wage and enforce it consistently for everyone, Bundestag printed paper, No. 19/975 of February 28, 2018.
  • 24 T. Schulten, M. Lübker, op. a. Cit., P. 11 f.

Title: Consequences and Perspectives of a 12 Euro Minimum Wage in Germany

Abstract: The introduction of the minimum wage in Germany in 2015 is widely regarded as a success because it has led to substantial wage increases for low wage workers with minimal negative consequences for employment. However, there is a growing public debate in Germany that the current minimum wage level of € 9.19 per hour is far too low and should be increased substantially towards a living wage level of at least € 12 per hour. Such an increase would be a far-reaching intervention into the German system of wage setting and collective bargaining and would directly affect nearly one-third of the German workforce. Finally, an increase towards € 12 would also mark a break with the current adjustment mechanism according to which the minimum wage should follow mainly collectively agreed wages.

JEL Classification: J30, J31, J52