Economists warn on minimum wage before German coalition talks

BERLIN Thu Oct 17, 2013 7:45am EDT

German Chancellor and leader of the Christian Democratic Union (CDU) Angela Merkel and party members arrive for preliminary coalition talks with the Social Democratic Party (SPD) at the Parliamentary Society in Berlin October 17, 2013. REUTERS/Tobias Schwarz

German Chancellor and leader of the Christian Democratic Union (CDU) Angela Merkel and party members arrive for preliminary coalition talks with the Social Democratic Party (SPD) at the Parliamentary Society in Berlin October 17, 2013.

Credit: Reuters/Tobias Schwarz

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BERLIN (Reuters) - Germany's leading economic institutes warned ahead of a round of coalition talks on Thursday against the introduction of a new minimum wage of 8.50 euros per hour, saying the move could lead to significant job losses in eastern Germany.

The center-left Social Democrats (SPD) have said they will refuse to form a government with Chancellor Angela Merkel's conservatives unless they agree to a nationwide minimum wage.

The issue is expected to be at the center of talks between the parties starting at 1 p.m. on Thursday. Merkel emerged victorious from an election last month, but needs a coalition partner to secure a third term. The collapse of talks with the Greens this week means the SPD is her only alternative.

"A blanket minimum wage that applies to all sectors and all regions would probably have significantly more negative consequences for the labor market than the current sectoral deals," the institutes said in a twice-yearly report commissioned by the German government.

Slightly more than a tenth of workers in western Germany earn less than the proposed 8.50 euros an hour, compared to a quarter of workers in eastern Germany, according to data from the IWH institute, which contributed to the report.

Because wages in neighboring Poland and the Czech Republic are lower, some fear companies in eastern states could move their operations across the border to keep labor costs down.

Unlike most European Union countries, Germany has resisted a minimum wage, in part because it was seen as political interference in wage bargaining between unions and employers. Instead it relies on collective wage deals by sector and region.

But coverage by such agreements has decreased to 59 percent of the workforce from more than 70 percent in 1998, according to the Hans Boeckler Foundation, and the low pay sector has surged in the wake of reforms to loosen up the labor market.

Reports of workers earning as little as 2 euros an hour have proliferated in recent years, particularly in eastern Germany.

The SPD campaigned on the need for a minimum wage and deputy SPD leader Andrea Nahles has said it is a condition for her party to join a coalition with Merkel.

Merkel's conservatives remain skeptical about a blanket minimum wage set by politicians. "We must be careful not to destroy jobs," Merkel said on Wednesday.

But her allies have shown a willingness to compromise. One suggestion, supported by economists, is the appointment of a non-political commission to determine how a minimum wage could be implemented and how high it should be.

ROOM FOR NEGOTIATION

Economists say the level of a minimum wage and the way it is introduced are crucial to avoiding job losses.

The DIW institute, which also contributed to Thursday's report, wrote last month that the "abrupt introduction of a minimum wage of 8.50 euros an hour is not advisable as the impact in certain market segments would be incalculable."

"It seems much more advisable to introduce one on a significantly lower level like in Britain, to carefully observe its impact and then adjust the level progressively if needed."

Mark Keese, a labor market expert at the Paris-based Organization for Economic Cooperation and Development (OECD), says Britain's experience suggests a minimum wage does not have to lead to job losses.

Britain introduced a minimum wage of 3.60 pounds an hour in 1999 which has risen progressively to around 6.30 pounds, equivalent to about 7.50 euros. There is little evidence that it caused the job losses initially feared by business groups and Conservative politicians.

"They set it at a reasonable level such that there haven't been employment loses or if there were any, they were very small," he said.

Keese believes the level proposed by the SPD is reasonable because it would put Germany in the lower to middle end of OECD minimum wages relative to a country's median earnings.

"A lot of other countries, including France and Britain, have higher minimum wages relative to average full time earnings," he said.

Of the 28 European Union countries, 21 have minimum wages. Those that do not, such as the Scandinavian countries, tend to have higher coverage by collective wage deals and smaller low wage sectors than Germany.

Implementation is key to avoiding job losses, say economists. Other countries have made the minimum wage lower for young people and for apprentices, to ensure even those without much experience or skills maintain access to the labour market.

(Additional Reporting by Rene Wagner in Berlin and David Miliken in London; Editing by Noah Barkin and Giles Elgood)

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