German (Randian?) Solution: No Minimum Wage

♠ Posted by Emmanuel in , at 5/01/2013 05:38:00 PM
Sometime ago, I remember watching former Fed Chairman Alan Greenspan testifying before the US Congress when he was asked about his views about the minimum wage. "There should be none," I reflexively blurted out. Knowing that Greenspan was a libertarian former acolyte of Ayn Rand, the answer was obvious and, true to form, that's what he said to the surprise of this congressman. This same debate is being played out in Europe as those championing reform of ossified economies point out that one of the features that makes German unemployment comparatively low to other European nations is its lack of a minimum wage. To be exact, there is no general minimum wage but sector-specific minimum wages arrived at through collective bargaining in the German corporatist system.

That is, would Portugal, Italy, Greece and Spain which are all suffering from very high unemployment be better off if they moved to a German-ish system? Many conservative commentators certainly think so, but it's important to point out that even Germans themselves are considering a EUR 8.5/hour minimum wage as pushed by the opposition Social Democratic Party (SPD). Indeed, it has already been passed in the upper house (Bundesrat):
The SPD is in favour of introducing a statutory minimum wage. On the official SPD website, they talk about the introduction of “humane” minimum wages. Indeed, after the regional elections in Lower Saxony in January, the changed majority situation in the Bundesrat permitted, according to the SPD website, to present a law proposal together with the Green Party for a minimum wage. It has been passed on 1 March 2013. This proposal demands € 8.5 for every employee in each industry sector – as enforceable right. They argue that this minimum wage is necessary in a social market economy and is, moreover, one essential element of human dignity. A minimum wage, according to Malu Dreyer, Prime minister of Rhineland-Palatinate (SPD), would bring both flexibility to the employers and security to the employees. It is now up to the Bundestag to approve this law proposal. 
In the FT, Alexander Privitera further argues that there is remorse on the social democrats' part for having pushed employment reforms that many cite for making Germany more competitive post-unification.: 
Mr [Gerhard] Schröder’s reforms helped this process. Limiting unemployment benefits pushed many to look for jobs. But the unintended consequence was that, today, the low-wage sector accounts for a remarkably high 20 per cent of all jobs. Germany’s victory in the battle against unemployment came at the cost of creating a two-tiered labour market – it has a flexible, low-wage sector and a higher-skilled, better-paid one that continues to be extremely rigid to this day.

Despite the fact that the Germans are promoting their reforms as a model to follow abroad, at home political parties still debate their benefits. Mr Schröder’s Social Democrats are convinced that the reduction in welfare benefits led to rising inequality, and argue that they should be partially reversed. Even some Christian Democrats now admit that a minimum wage might be necessary. One of the main lessons of the Schröder reforms is that timing matters. Pushing Europeans too hard, too quickly and all at the same time will not make them stronger. It could drive them over the cliff. 
Given what's happening in Germany, you have to wonder if the current CDU/FDP advocacy for the rest of Europe holds water. Not economically--you can have an endless debate on that, and people do--but politically insofar as left-leaning parties seem keen on introducing a "wage floor" that definitely is not in tune with the "Germany is a model for Europe--no pain, no gain" line of reasoning.