The Bothersome Success of the Minimum Wage: The German Labour Market Faces the Refugee Crisis

This article was external pageoriginally publishedcall_made by the external pagePolish Institute of International Affairs (PISM)call_made on 11 January 2016.

Exactly a year ago, Germany introduced a minimum wage of €8.50 per hour. Fears that the new regulation would increase labour costs and further translate into an increase in unemployment, have not so far come true. In November 2015, only 6% of the economically active population was unemployed, while the number of employed persons exceeded 43 million, the highest level in history. It is happening under a substantial increase in wages, especially for those with low qualifications. Positive changes have also occurred in the employment structure. The number of so-called mini-jobs (flexible forms of employment widely applied for low-skilled positions) decreased between January and September by 128,000 (down 1.7%), while “full” employment rose by 688,000.

Despite the data, the flagship social project of German Chancellor Angela Merkel’s government is still under fire from critics. Its adversaries claim that the labour market is in good shape despite, and not because of the minimum wage. What helped the economy in 2015 to grow was the fall in fuel prices and an undervalued euro (by around 15%), which strengthened exports. These factors will not be as strong in 2016 and instead some new painful challenges may arrive. One of them is already here—the refugee crisis—and it particularly exposes the flaws of the minimum wage.

In 2015, Germany attracted more than 1.1 million refugees, or more than five times the year before. Despite eventually tightening border controls and adding new restrictions to the country’s asylum policy, the refugee figure is expected to increase at the end of 2017 to 2.7 million, of which one million will likely receive asylum and thus the prospect of permanent residence in Germany. The key to their integration into German society will be employment. The problem is that their qualifications and skill level are often too low for employers to be ready to pay them even the minimum wage. Germany, therefore, is debating what to do, fearing the current success of the basic wage can quickly turn into a bothersome worry.

Extension of Exceptions

On first thought, the idea to abolish the minimum wage will enjoy some popularity. However, German politicians remember that the regulation sprang from anxieties by society about severe wage competition, expansion of the low-wage sector and a perceived income gap. The party least interested in changing the rule is the SPD, which now suffers enough from weak leadership and the lowest support in its history (22.5%). Also, the Christian-Democrats are far from thinking about giving up the minimum wage. Merkel knows that doing so would boost the popularity of the anti-immigrant political movement PEGIDA and the party Alternative for Germany (AFD).

Therefore, another option is being considered: the introduction of exceptions from the minimum wage. These would not be new measures. The rate of €8.50 per hour does not apply to those under 18 years of age, apprentices (unless the practice period is less than three months) and the long-term unemployed for the first six months of employment. Asylum seekers could be assigned to one of these groups or possibly included into a new general category of “newcomers” that take up employment in the German labour market for the first time. It could include both young Germans and asylum seekers, regardless of age.

The positive side of this universal solution is the lack of an evident stigmatisation of asylum status, which is certainly positive for social integration. The politicians may find it hard to count on fears fading among society about rising wage competitiveness between native workers and migrants because competition is simply unavoidable. The only hope is that the German economy will still create enough jobs to temper any conflict. Unfortunately, this is not the only problem with the exception-based method.

There are doubts about its effectiveness. Supporters of the minimum wage may be right in criticising the widespread conviction that there is a potential bunch of low-paid jobs in the economy that would blossom if not blocked by the minimum wage. This does not take into account that in many sectors—including those with low-skill positions such as security personnel or building cleaners—there are tariff agreements that treated the statutory minimum hourly rate as a benchmark and ensure their employees a slightly higher rate. It would be very difficult for the government to induce the trade unions to give up these agreements since the minimum wage would officially continue to apply.

Also, calls for exceptions from the minimum wage do not always take into account the existence of “basic security” in social legislation. It means, roughly speaking, that if people earn less than a certain amount per month, the state has an obligation to compensate them for the difference. Given the scale of the refugee influx and at least one million more eligible to seek work in Germany, the public budgets could be exposed to enormous expenses. The minimum wage means that at least some of the burden falls directly on employers.

More Activation Policy

Discussions about flaws in the minimum wage have mobilised its defenders. They claim that it not only strengthens demand in the economy but also creates strong incentives for asylum seekers to work and invest in new qualifications. This view is reinforced by the argument that among refugees, young people comprise the dominant group and are characterised, by definition, as more open to acquiring new knowledge. The abolition of the minimum wage could push them permanently into the low-wage, low-skill sector, which would be contrary to the objective of the integration of refugees.

However, for the minimum wage to be successful given the new challenges, amendments are required. It is necessary to extend incentives to refugees themselves to increase their qualifications and for employers to hire them. It simply means subsidising education and employment, e.g., in the form of vouchers distributed to those seeking work or training through which companies or educational institutions would receive tax breaks or direct financial support. This approach has its drawbacks. In addition to high costs for the state it requires complicated regulation of status entitlement to be eligible for the subsidies. Another problem is that supported employment can disturb the market, crowding out “ordinary” employment. There is a political dimension, too: “regular” employees can feel endangered by “subsidised” newcomers.

The European Dimension of the Mindestlohn

Discussion about changes to the minimum wage in reaction to the new challenges will last at least until mid-2016. At that time, a special committee composed of parties from the tariff systems should decide on “adapting” the rate. Just a few months ago, it was close to obvious that it would recommend the government increase the minimum wage to €9–9.50 per hour. Today, hardly anyone believes that. The most likely scenario is that the rate will be frozen at the current level and new experiments enacted with exceptions and subsidisation of employment for refugees who have been granted asylum.

These decisions will have an impact far beyond the borders of Germany. Many EU Member States are carefully watching the action in Berlin because they also have a minimum wage (22 out of 28 countries) and are facing a similar challenge to adapt their social institutions and labour market to the growing number of refugees. Some of them fear that high minimum wages will attract more refugees, while others are not going to change it, fearing protests by their own societies.

In this clinch, the solutions adopted by Germany, the EU’s largest Member State, can form a benchmark and a base for a coalition of countries in the EU interested in creating special funds and programmes for the integration of refugees. It would not be a politically neutral trend, since it would create another platform for deepening integration among selected countries. Moreover, if new initiatives were to be financed by a shift from, e.g., structural funds, countries with less of a refugee crisis but who are beneficiaries of the existing structure of EU spending would likely loudly protest.

Among the latter countries is certainly Poland, which has actually more reason to observe the German debate about the minimum wage than others. Warsaw protested this year when Polish transport companies were placed under a regime that forced them to pay the German rate to their truck drivers who crossed the border. The European Commission has not found any fundamental incompatibility of that regime, called the Mindestlohn regulation, with Community law apart from transit transport. The case appears to be resolved. If, however, the discussion in Germany on the adjustment of the minimum wage to better integrate refugees begins to move towards complete abolition of this regulation, Polish companies and state institutions would have a good opportunity to increase the pressure on Berlin. For now, however, there is little indicating such a scenario.