Minimum wage in Germany ‘a completely unnecessary mistake’, says Berenberg Bank Chief Economist | Video

World Finance interviews Holger Schmieding, Chief Economist of Berenberg Bank, about the introduction of minimum wage in Germany

May 1, 2014

Minimum wage is due to be introduced into Germany next year, but why now when the economy is just getting back on track, and what will the knock-on effect be for the rest of Europe? Holger Schmieding, Chief Economist of Berenberg Bank, talks about the political motives behind minimum wage and why introducing it could be a mistake for the German economy.

World Finance: Well Holger, obviously next year Germany, Europe’s strongest economy, will introduce minimum wage. Why now?

Holger Schmieding: This has nothing to do with economics, that is pure politics. Because Chancellor Angela Merkel lost her coalition partner in the last election, she had to take on board a centre-left party, and as a condition for joining Merkel, the centre-left simply demanded a minimum wage. Merkel granted that, and now it’s just a question, will it do a lot of damage or not?

World Finance: So you think it’s political fodder just because elections are looming?

If it’s not broken, don’t fix it. But political logic has dictated Germany to do otherwise

Holger Schmieding: The economic logic, if you just look at the German economy, it’s doing well. The labour market is doing extremely well. You would not say there is a need to interfere in the German labour market. If it’s not broken, don’t fix it. But political logic has dictated Germany to do otherwise.

World Finance: Labour unions traditionally determine wages in Germany, so why do you think this is changing?

Holger Schmieding: Traditionally, labour unions in Germany were against a minimum wage, because they were setting wages branch by branch, sector by sector, in negotiations. But, 10-15 years ago, Germany had record unemployment. As a result of that, unions lost power, so there are now significant parts of the economy where the unions are no longer negotiating wages, and hence the union attitude to minimum wage has shifted, they now want basically the government to set a floor for all wages, and then negotiate in a way that tops-up for certain sectors.

World Finance: Well it is widely understood by economists that minimum wage perhaps causes unemployment. Do you subscribe to this?

Holger Schmieding: Yes, an excessive minimum wage does cause unemployment. Having said that, Germany at the moment has a booming labour market. Germany actually needs more qualified workers, so while the demand for labour is strong, the minimum wage will have only very small negative effects on some of the low skilled people who will find it more difficult to get a job.

But for the next few years, we are not going to see a major negative impact of the minimum wage. That may come if in the future the economy turns down, or if the minimum wage is then raised too much.

World Finance: Well Deutsche Bank actually estimated that 450,000 to 1m jobs could be lost if this is implemented, by 2017. Do you think this is accurate?

Holger Schmieding: That is probably an exaggeration. We will have job losses, yes, but while the economy is doing well they will be very very small. The real job losses will come during an after the next recession, and I sort of hope that the next recession is not due by 2017.

World Finance: Well considering Germany and Europe is still recovering from the recession, is 2017 too early to implement economic systematic change?

Holger Schmieding: There are ways to mitigate the negative impact of the minimum wage. If there is more of a wage subsidy for low skilled people, then for instance the negative impact of the minimum wage, that employers don’t want to hire the low skilled because they’re not productive enough, then with wage subsidies that economic impact, the negative one, could be reduced. That is a debate for the future. The point remains, the minimum wage is bad, the damage will initially will be small, and we’ll have to see some five to 10 years from now how bad the damage will really be.

World Finance: How do you think it will impact Germany in terms of competitiveness?

The real impact will be on parts of the domestic economy, where you have comparatively low skilled people

Holger Schmieding: It has virtually no impact on German competitiveness, because the industrial firms, the German firms, the brands name firms, the cars, those firms producing these cars will not have any significant impact of it. They qualify highly skilled people who are much more productive, whose wages are far above the minimum wage. The real impact will be on parts of the domestic economy, where you have comparatively low skilled people.

World Finance: Will countries without a minimum wage such as Germany have very low youth unemployment, whereas the UK since minimum wage was implemented in 1999, youth unemployment has soared. So what do you think will happen once this is introduced to Germany’s youth?

Holger Schmieding: Probably we’re not going to see, again, a negative impact immediately, because at the moment employers are looking for young people, they can’t get enough of them, because of partly Germany’s demographics. Germany didn’t have a lot of babies 15-20 years ago. It will only be on those who have no exams, who have not finished school properly, that is who have very little qualifications.

World Finance: Well now, up to 2011, conscription was enforced in Germany but that’s not the case anymore, so do you think with the introduction of minimum wage perhaps we could be looking at the future, a work-shy population in Germany?

Holger Schmieding: The minimum wage is not so high that a lot of people would say “I’m not productive enough, I don’t try to work”, or that a lot of people would say, “OK, I’ll take a job with the minimum wage and don’t aspire to do better. In that sense it’s probably not very damaging.

World Finance: Well of course, we need to mention inflation, so how do you think this will affect Germany when minimum wage is implemented?

Holger Schmieding: We will likely see a modest rise in prices in some sectors. For instance, a basic haircut, which is actually often semi-qualified labour doing that, a basic haircut may become more expensive, because wages for some haircutters, especially in East Germany, are half the current minimum wage. So, in some sectors, we’ll see an impact. But cars will not get more expensive, energy will not get more expensive, food will only get a little more expensive. Overall, the impact of the minimum wage on prices may be an upward adjustment by 0.1 to 0.2 percent on average at most.

World Finance: So finally, if you’re just going to sum it up for me, how will the affect Europe overall?

Holger Schmieding: The German minimum wage is not going to have a major impact on Europe, it will not put a major dent on German competitiveness, it will in the long run hurt German labour market, hurt German public finances a little, but only to an extent to which Germany’s neighbours will probably not feel.

World Finance: So you’re not too concerned about it?

Holger Schmieding: I think the German minimum wage is a mistake, but if it ‘s not done too badly, it it’s not raised too much it will not be an extremely costly mistake, just a completely unnecessary mistake.

World Finance: Holger, thank you.

Holger Schmieding: You’re welcome.