What about introducing a statutory minimum wage in Germany ?

Since 1993 the percentage of low-wage workers among full-time employees subject to compulsory social security contributions has risen from 13.8 % to 17.3% (2003) with a significant difference between West (16.6%) and East Germany (19.0%) [Calculations made by Thorsten Kalina, IAQ]. These percentages have been calculated on the basis of monthly salaries. The calculation on the basis of hourly rates – which includes part-time-workers and marginal part timers – reveals a share of low-wage employment of 20.8% or, in absolute numbers, more than 6 million employees. The West German rate is 20.5% compared to 22.5% in East Germany (2004). On the basis of Kalina and Weinkopf (2006a), the low-wage threshold is 9.83 € per hour in West Germany and 7.15 € in the eastern part of the country. The calculation is based on a definition of low wage as below two-thirds of the median of monthly/hourly gross salary. What is the meaning of these results in an European perspective? Germany belongs to the European countries with the highest share of low wage employment; only four countries: UK, Ireland, Netherlands and Greece have higher shares than Germany (European Commission 2004).

The structural analysis shows high proportions of low-wage employees among unskilled workers, women, young people and non-German workers. With regard to low wages, the share of these groups is significantly higher than their share in the economy as a whole. Concerning the distribution of low pay by company characteristics it becomes obvious that the share of manufacturing industry and large companies is decreasing while the share of the service sector (transport, business services, household and personal services) and small companies is increasing. Particularly affected by low wages are part-time workers and especially marginal part-timers (salary up to 400 € per month): Nearly 50% of all low-wage employees are part-timers whereas their share in the economy as a whole is 28%.

One hypothesis concerning the growth of low wages emphasizes the process of outsourcing: Jobs from sectors and companies which are characterized by strong works councils are moving to small companies of the service sector. The latter type of companies is characterized by a lack of employee representation, moreover unions are too weak to set minimum standards.

A second hypothesis addresses the significant decline of collective bargaining coverage in recent years. According to the findings of a survey of management executives (IAB Establishment Panel), the percentage of employees in West Germany covered by collective agreements decreased from 76% in 1998 to 68% in 2004 with the industry-wide collective agreement being the most important form (61%). The processes in East Germany are similar, even though on a lower level: approx. 63% of employees have been covered by collective agreements in 1998 and only 53% by 2004. The share of employees covered by industry-wide collective agreements in Eastern Germany is 41% (Ellguth/Kohout 2005). In a cross national perspective Germany meanwhile has the second lowest degree of collective agreement coverage in the EU behind the UK.

The decreasing effectiveness of collective agreements is not solely the result of the decline of formal collective bargaining coverage. To what extent companies covered by collective agreements adhere to the negotiated regulations – that’s a decisive factor. Unfortunately there are no broadly based insights into the real effectiveness of collective agreements at company level but according the findings of the WSI Works and Staff Council Survey 2004/2005 (Bispinck 2006) there are a number of problems of the application and implementation of collective agreements, especially in connection with income provisions. 11% of the works councils in West Germany and 16% in East Germany affirm deviations from collective agreements in a downward direction in their company.

Until the end of the 90ies the most important instrument to secure minimum standards for wages has been the general binding of collective agreements by declaration of the Employment Minister (Allgemeinverbindlicherklärung). This instrument served to ensure minimum standards for employment relationships in sectors and regions in which companies not covered by collective agreements pose a threat to the normative status of the collective bargaining system. The instrument is in a crisis for some time now as the number of collective agreements which are generally binding has fallen by more then 30% since the last decade, due to the restrictive voting practice of the employer associations in the bargaining committees which decide on the extension of collective agreements. Employer associations have adopted a markedly hostile stance towards the extension of pay-related collective agreements Bispinck/Kirsch 2003).

Since 2004 a public debate on the possible introduction of a statutory minimum wage takes place in Germany. The Confederation of German Employers’ Associations is strictly opposed to any national minimum wages whereas the majority of the trade unions are supporting a statutory minimum wage. In 2006 the Food, Beverages and Restaurant Trade Union (NGG) and the United Service Union (ver.di) – the trade union for the entire service sector – started a campaign for a national hourly rate of 7.50 €. According to the chair of the trade union NGG – campaigning since the late 1990s in favour of a national minimum wage – the existing system of pay determination is no longer sufficient to prevent the emergence of a growing low-wage sector in Germany. The deputy chair of the union ver.di acknowledged that such a minimum wage (of 7.50 €) would be well above some collectively agreed rates of pay. She argued that sectors with collectively agreed rates of pay fixed at 3.90 € an hour, which exist in eastern Germany, could not be taken as a standard. Only the Mining, Chemicals and Energy Industrial Union rejects this suggestion; it fears negative repercussions on the collective bargaining autonomy, the inadequacy of a possible statutory minimum wage, and – consequently – the potential effects on the wage and salary levels that are governed by collective agreements.

The political parties of the great coalition which governs Germany since 2005 are divided about the question. While the conservative Christian Democratic Union (CDU) strictly rejects the introduction of a statutory minimum wage, most of the leading members of the Social Democratic Party are supportive of the idea. With regard to the low-wage sector both big parties currently made different propositions for the introduction of a system of state-subsidized wages (tax credits respectively exemption from contributions to the social security system) that would be applied for wages which are below certain thresholds (Kombilohn). In order to prevent an “exploitation” of the state-subsidies by the employers the Social Democratic Party principally sees the imperative to combine such a system with the introduction of a national minimum wage.

Concerning the determination of the “right” level of a statutory minimum wage level two concepts are used. The first concept takes the share of minimum wage earners in all employees. For Germany and full time workers the share is 1.3% for a 5 € minimum wage and 8.2% for a minimum wage of 7.50 € (for full-time-workers). The second concept calculates the relation of the minimum wage to the average wage. In Germany a minimum wage of 7.50% per hour would correspond to nearly 50% of the average wage; in an international context Germany would range in the upper third in Europe. A minimum wage of 5 € – corresponding to 33% of the average wage – would place Germany at the end of the ranking, together with Estonia – and comparable to the USA.

Our Institute, the Institute Work and Qualification at the University Duisburg-Essen (IAQ), recommends a level slightly below 7.50 € for the introduction of a statutory minimum wage whereat the great earning differences in East and West Germany should be considered (Kalina/Weinkopf 2006). Furthermore the IAQ recommends a long term announcement of the introduction and an evaluation of the implementation process by an independent commission.

Germany is one of only seven countries in the EU (EU of 27) without a statutory minimum wage and without any alternative institutionalised way to guarantee a minimum wage floor. In order to support the approximation of the living conditions and to guarantee every employee an equitable pay as laid down in the Community Charter of Fundamental Social Rights of Worker (1989) the Institute for Economic and Social Research (WSI) at the Hans-Böckler-Foundation (foundation of the German confederation of Trade Unions) calls for a European minimum wage policy. This policy should aim at the obligation of every European country to raise its minimum wages to a level of at least 50% of national average earnings. The WSI demands that the federal government of Germany, within the framework of the actual EU-presidency, should campaign for such a coordinated European minimum wage norm. A substantial part of this engagement should be the quick introduction of a minimum wage in Germany, whose level should be oriented toward the level of its European neighbouring states.

Institute Work and Qualification (IAQ) at the University Duisburg-Essen