IMF slaps Germany with minimum wage warning

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The latest report by the International Monetary Fund (IMF) on the German economy was just released, and as you might expect, it’s a fairly glowing report.
But on at least one area, Germany’s new €8.50 (£6.73) minimum wage, the Fund is warning that the European powehouse could run into trouble.
The staff give five arguments against the law. In short, it could reduce employment, as well as competitiveness, the existing system of bargaining works well, tax transfers are a better tool for redistribution, and higher household wages will mean reduced tax credit-style transfers, leaving some barely better off.
In contrast, there were just two points in favour – the first argument the IMF makes is that collective bargaining is apparently more common in better-paid jobs, meaning some low paid workers are not covered. The second is that the minimum wage could make a the country’s wage top-up programme more effective and less costly.

The data shows the minimum wage earners are concentrated in the east of the country, and are more likely to be female and part-time workers. The Fund also shows that all of the six states which were formerly part of east Germany have unemployment rates above the national average. The minimum wage could become binding for a fifth of workers in some parts of the country, leading the authors to ominously suggest that "sizeable adverse effects in these areas could materialise".

To add to which, while most of the advanced economies in the European Union have seen very little or no increase in the proportion of low-paid work during the years around the financial crisis, Germany’s astonishing employment boom (unemployment fell from 12.1 per cent at the start of 2005 to nearly half of that at the end of 2010) produced a lot of low-wage work too, making the knock-on effects of a minimum wage potentially larger than they once would have been.

The Fund falls short of suggesting that Germany ditches plans to bring in a minimum wage (the policy was a cornerstone of the country’s new coalition deal), but fretting about “non-negligible employment effects” is likely as candid as the IMF are willing to get. The law bringing in the wage comes in at the beginning of 2015, so watch this space.

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