Germany’s labour market. A lesson from Tony Blair

The Germans quarrel about a minimum wage

GERMAN leftwingers generally see Britain as a den of rapacious free-market capitalism. So it was striking this week that members of the British low-pay commission were greeted in Berlin with open arms by such traditional lefties as Oskar Lafontaine, the Left Party's parliamentary leader, and Andrea Nahles, a leading Social Democrat. Their interest in British labour-market policies reflects a debate over what to do about Germany's army of low-paid workers and long-term unemployed. To some, Britain's minimum wage, combined with wage subsidies, offers a model.

At first blush, the minimum wage introduced by Tony Blair's Labour government in 1999 looks appealing. Globalisation has led to greater inequality in Germany. Between 1997 and 2004, the share of German workers earning "low pay", as defined by the OECD, rose from 16% to over 20%, says the German Institute for Economic Research in Berlin. The government's original plan was just to introduce wage subsidies for the long-term unemployed, who make up more than half of Germany's 4.7m jobless. But if such payments are not to become an incentive to pay even less (making the government pay more), some argue that a statutory wage floor is needed as well. Indeed, Germany is unusual in not having a minimum wage (see chart).

Yet it is always risky to import reforms from another country--even Britain--because in a different environment, they may have unintended consequences. Germany's labour market is far less flexible than Britain's, despite a raft of reforms in recent years. The minimum wage seems not to have raised unemployment in Britain; but it could easily do so in a more rigid economy such as Germany's.

In any case Germany has a de facto minimum wage, set by the level of benefits for the long-term unemployed. A single person out of work for over a year gets an average of euro650 ($825) a month, about euro5 an hour. Because he can work illegally on the side and needs an incentive to take a job, a potential employer must pay at least euro10 an hour, says Hilmar Schneider, of the Institute for the Study of Labour in Bonn. For families the figure is even higher, as they get extra unemployment benefits.

Believers in a minimum wage say it ensures that people can earn a decent living. And if set at a lower level than in some other countries--say euro7.50 an hour, which the unions have called for--it need not cost jobs. Yet the German economy is not as dynamic as others. Also, many of Germany's low-paying employers are small companies in the east that cannot afford higher wages, not least because they compete with firms in lower-wage Poland.

What is more, the institutional set-up would be different. In Britain, a government-appointed commission fixes the minimum wage, and it has done so cautiously. In Germany, with its tradition of collective bargaining, the wage floor is likely to be set in negotiations between unions and employers. These groups have shown before that they are willing to raise wages at the bottom, even if that means pricing low-skilled workers out of jobs.

Such complications are not lost on the government. Franz Muntefering, the Social Democrat labour minister, already seems to be backtracking on the minimum wage. He may end up proposing only to introduce a few more sector-specific minimum wages, which already exist in construction and some other industries. Yet some see a minimum wage coming, because existing and planned in-work benefits would otherwise become too costly.

The heated debate about a national minimum wage will have served a purpose, even if it never happens. It may bring closer the realisation that Germany must get its labour-market incentives right, for instance by adopting more widely and strictly another British labour policy, pioneered by America: workfare, when welfare benefits are paid only if recipients engage in some activity, such as a training programme or a socially useful job. But, unlike the minimum wage, workfare is anathema to Germany's traditional left.

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