Germany’s Minimum Wage is a Bright Spot in an Otherwise Austere Policy Plan

Pending the finalization of the new “Grand Coalition”, the German government will institute some controversial policy changes during Angela Merkel’s third term as Chancellor. On aggregate, these policies will make a positive impact on German consumption, but will not do much dramatically to boost economic growth for Germany or the broader eurozone. In particular, the proposed measures will do very little to solve Germany’s structural problem of permanent underinvestment in public infrastructure and education. However, one exception ─ the decision to move toward a federal minimum wage ─ will provide more positive change that negative impact on competitiveness.

German unemployment statistics mask a story of depressed consumption without a gain in competitiveness

Germany’s pending decision to institute a federal minimum wage highlights the pushback that the government has received about growing inequality. German unemployment currently sits at 5.2%, a full 7.0% lower than the eurozone average. However, more than 25% of Germany’s workforce are “low income”, which is the highest percentage of low earners in Europe after only Lithuania. While minimum wages exist in some industries, a national minimum wage should increase purchasing power for German labor, and in turn increase consumption. This is good news for German workers, as well as for eurozone companies whose painful pivots towards export competitiveness have not been rewarded by German purchases of their products.

Conversely, the federal minimum wage necessarily increases labor costs, which could decrease German competitiveness. Taken at face value, the wage increase will raise German labor costs by about 1.0%. However, how much of this actually ends up in a net reduction of German competitiveness depends on a number of factors, including the relative development of labor productivity and prices in Germany and in partner countries. What’s more, mini jobs, or flexible low-paying employment, have increased rapidly as a percentage of total employment throughout the financial crisis. Still, German labor costs have decreased only 4.0%, less than any other European country. Meanwhile, central and eastern European countries reduced costs 17.8% in the same period, improving their cost competitiveness relative to German manufacturers.

The institution of a national minimum wage is thus less a threat to Germany’s relative competitiveness than it is a positive step towards increasing Germans’ systemically low consumption. Though a highly flexible labor force contributes to Germany’s competitiveness, the rapid increase in low-paid workers is holding down German consumption without much increase in competitiveness to show for it.

While Germany’s new government will largely hold to the status quo, with little additional support for investment, education, or the broader eurozone economy. Conversely, the institution of a federal minimum wage is a positive step toward providing a baseline for German consumption.

While Germany’s government enjoys safe-haven status, its economy does not. Complacent post-crisis economic and financial policies, such as lack of business and infrastructure investment, are exposing the economy to fluctuations in global economic growth. Germany’s new government will largely hold to the status quo, with little additional support for investment, education, or the broader eurozone economy. However, the institution of a federal minimum wage is a positive step toward providing a baseline for German consumption.

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