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Germany – Minimum wage increases won’t help poorest workers

20 March 2014

The introduction of a minimum wage of €8.50 will not substantially increase the income of Germany’s poorest workers and will endanger up to 900,000 jobs, according to a new study jointly conducted by Ifo research professor Ronnie Schöb, Marcel Thum, executive director of Ifo Dresden, and the Magdeburg-based financial economist Andreas Knabe. 

Schöb commented: “Workers who are currently topping up their income [will be] hit particularly hard.”

According to the research, workers and employees who also receive supplementary Stage II unemployment benefits (Hartz IV), will not feel much financial benefit from the wage increase and will face far higher unemployment risks.

Stage II unemployment benefits is an allowance that is lower than ordinary unemployment benefit and is payable when the claimant cannot receive full benefit or their period of benefit has come to an end, but they are still fit to work and registered as a job-seeker. It is possible for people in employment to receive the Stage II benefit.

If the hourly wage of a single worker who receives supplementary benefits increases from €5 to €8.50, their monthly net income will only increase by €60 per month or +6.1%; as the additional income earned will largely be offset against any stage II unemployment benefits claimed. For employers, however, labour costs will increase by +70%.

The total employment losses amount to up to 900,000 jobs. This includes the loss of 660,000 marginal employment positions (including pensioners and students). The total loss of full-time positions corresponds to around 340,000 jobs.

Two thirds of workers receiving supplementary benefits have worked for a wage below €8.50 to date. Around 5 million workers will potentially be affected in Germany, which represents 14% of all workers, with this figure as high as 20.4% in eastern Germany. For full-time employees the figure is around 1.2 million workers (5.2% of all full-time employees).

Comparisons with the minimum wage in other countries are therefore misleading. In Great Britain a minimum wage of £3.60 was introduced in 1999.

“Only 5% of workers were affected at the time. If a similarly cautious start were to be made in Germany, the minimum wage would not be higher than €6.22,” Thum explained. This would correspond to €6.47 in the west and €4.62 in the east. A minimum wage based on the U.S. model would be even lower.

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