Statement from ZEW President Wolfgang Franz - Introduction of Statutory Minimum Wages would Cost Jobs


Germany is once again discussing the implementation of statutory minimum wages. According to Prof. Dr. Dr. h.c. mult. Wolfgang Franz, President of the Mannheim Centre for European Economic Research (ZEW), their introduction would, however, destroy jobs. They would further impede efforts to provide poorly qualified job-seekers with new opporutnities for employment.

In  the current debate, statutory minimum wages are seen as a measure against so-called "wage dumping" and against concerns about companies using a possible introduction of combination wages to massively decrease general wages at the expense of social security systems. The term "wage dumping" is used particularly frequently in debates concerning EU guidelines for service providers. An often cited example is that of Polish butchers, who started working in German abattoirs around one year ago. The fact that  they offer to work at the significantly lower Polish wage rates, means that German butchers have been driven out of their jobs. Statutory minimum wages were demanded as an immediate reaction to this phenomenon. Such minimum wages should amount to the respective work payment and thus protect the jobs of German butchers. According to Wolfgang Franz, however, this is not a reliable way of safeguarding jobs. Rather than securing jobs in Germany, butchering would simply be outsourced to foreign countries, in this case, to Poland, where they would ultimately be performed at the lower foreign wage rates. As a result, cheap meat would be imported back to Germany and the job loss would remain unchanged. The only effective counteractive measure would be to implement an import duty on Polish meat products. In other words, to implement an import duty within the EU. The next obvious question would be why such an import duty should only apply to meat products. According to Wolfgang Franz, this question alone reveals the ridiculous nature of minimum wages.  Minimum wages could also cause problems for service providers such as hairdressers, to the cost of customers, as they would affect competition.

The other problem that minimum wages are designed to tackle is that of combined wages. The argument is that if combined wages are used as a wage subsidy for employees to incentivise them to take a job in the low-pay labour market, employers might be tempted to decrease wages. Since the government support payments would rise accordingly, the employees concerned would not be directly harmed. Nevertheless, welfare costs would rise unpredictably. Having said this, such an assumption should not really result in the introduction of minimum wages, but rather to critical questioning of combined wages as a policy instrument. "Wishing to prevent the adverse effects of one  medication by taking an additional medication - such as implementing a minimum wage to tackle combined wages,  does not make sense", argues Wolfgang Franz.

In Franz's opinion, France's experiences with a minimum wage should also be a cause for concern. The introduction of minimum wages in France has led to a considerable rise in unemployment amongst poorly-qualified young people. Despite these objections, the advocates of minimum wages regularly refer to the favourable outcomes of implementation of minimum wages in other countries, where implementation does not seem to have imparied the jobs market. Wolfgang Franz cites three reasons why he considers this to be a misleading conclusion. Firstly, the healthy labour markets in these countries are by no means proof of the supposedly positive effects of minimum wages. Without them, unemployment might be even lower. Secondly, the binding effect of statutory minimum wage's is generally rather low in many countries. In the United States, for example, only a proportion of companies are bound to minimum wage law. Sanctions for violations also tend to be rather mild. Furthermore, the minimum wage fixed in dollars is raised only after long intervals. Price increases therefore offset the real binding effect . Thirdly, minimum wage is simply the non, or almost non-existent minimum income support in some countries. Germany, however, already provides this in the form of "Arbeitslosengeld II"(German unemployment benefit paid after the first 12-18 months of unemployment).