Minimum wage in Germany: The current debate

Professor Müller, the minimum wage in Germany is set by the Minimum Wage Commission, in which employees, employers and academics are involved. In 2023, the commission set the minimum wage at 12.82 euros from 1 January 2025. Now there are calls for a significantly higher minimum wage. Chancellor Scholz, among others, has spoken out in favour of increasing the minimum wage. He has argued in favour of an increase to 14 euros, to be followed by a rise to 15 euros. Is this demand coming at the right time?

Steffen Müller: Germany has had comparatively good experiences with the minimum wage so far. The introduction of the lower limit of 8.50 euros in 2015 has hardly cost any jobs and current studies suggest that even the increase to 12 euros in October 2022 had no negative effects on employment, at least in the short term. However, the effects of the minimum wage ultimately depend on its level and there is a point at which jobs are increasingly destroyed. With a demand of 15 euros, but even with 14 euros, Germany would have one of the highest minimum wages in the EU, currently behind Luxembourg, the Netherlands and Ireland. On the other hand, Germany currently has one of the weakest growth rates in Europe. It is quite possible that a minimum wage of 15 euros will lead to job losses after all - especially during an economic downturn. 

When the Minimum Wage Commission last passed a resolution in June 2023, the minimum wage was set at 12.41 euros on 1 January 2024 and 12.82 euros on 1 January 2025. This moderate increase was justified by the fact that the resolution was passed at a time of weak economic growth and persistently high inflation in Germany. The consequences of the COVID-19 pandemic also continued to be felt in many sectors of the economy, as well as the economic consequences of Russia's war of aggression against Ukraine. In view of this moderate increase, is it not time for a significantly higher minimum wage in Germany?

We must not forget that the minimum wage had previously risen rapidly, first to 10.45 euros on 1 July 2022 and then to 12.00 euros on 1 October 2022. The latter was an increase of 14.8 percent. The reasons given for the moderate increase at the beginning of 2024 and now in 2025 are understandable. After all, moderate growth of over one percentage point is forecast for 2025 and interest rate cuts by the ECB could give the economy a boost. What makes sense from 2026 onwards will then be discussed in the Minimum Wage Commission next year, taking economic developments into account. I can imagine that there will be a further slight increase in the minimum wage. 

Nevertheless, individual companies are moving in this direction: the food retailer LIDL has announced that it will pay a minimum entry-level wage of 15 euros from September. The trade unions are currently demanding wage increases in the range of 7 to around 15 per cent and have already been successful in the banking sector, for example.

The wage setting of individual companies differs fundamentally from the considerations that should guide the negotiating partners in the Minimum Wage Commission. A statutory minimum wage represents a lower limit for all companies, regardless of how well they are doing economically. If the minimum wage rises sharply, weak companies will cut jobs or close down completely. The fact that individual companies in the low-wage sector are already paying a lower limit of 15 euros and communicating this effectively in the media indicates an increased need for labour in these companies. Of course, there are also sectors in which wages are much higher than 15 euros per hour.

Collectively agreed wages also represent a binding wage floor. However, this only applies to companies that pay according to collective agreements and, in principle, companies are free to withdraw from the collective agreement, although this can also result in withdrawal from the employers' association. The difference to the minimum wage is therefore that companies can legally avoid the collectively agreed wage floor. The parties to the collective agreement therefore generally ensure that the weakest companies that still pay according to the collective agreement are not overburdened.

Around 45 million people work in Germany, of which around 6-7 million are likely to be directly affected by a change in the minimum wage. That's about as many people as the largest trade unions have members and who often benefit from higher collectively agreed wages. Against this background, how important is the minimum wage for society as a whole?

Minimum wages can be justified economically above all when employers have a high level of labour market power over low-wage employees and dictate wages that are far below the productivity of these employees. This is not just a question of fairness - however it is defined - because this so-called monopsony power can lead to too few people being employed. In such situations, minimum wages can actually increase employment. There are studies that link minimum wages with higher job satisfaction. I don't dare to judge whether there are any other positive effects of the minimum wage on society as a whole. 

The decision-making minimum wage commission is currently under pressure. Initially, the Bundestag [the German Parliament] decided on an increase that bypassed the commission, then there was disagreement within the commission in 2023. Now, for example, the Minister President of Lower Saxony, Stephan Weil, has called for a reform of the Minimum Wage Commission. The SPD [German social democratic party] politician is quoted as saying that it should not only look at the economic aspects, but also consider the social impact. Do you believe that the minimum wage commission model should be reformed?

In my view, such statements are more likely to play a role in the pre-election campaign for the 2025 German federal election. The Minimum Wage Commission is already made up of the parties to the collective agreement, i.e. representatives of employers and trade unions. I think it goes without saying that in the end, those who have to pay the wage will have a majority. Otherwise, orders would be placed at the expense of third parties. I also don't think much of politicising wage-setting by including well-written but ultimately undefined battle terms such as decent wages, justice, dignity or respect.

Employment has hardly fallen as a result of the introduction of the minimum wage. If not via the employment adjustment screw: How can companies compensate for the introduction or increase of the minimum wage? Who ultimately pays for the minimum wage?

There are basically three ways to finance higher labour costs for the same level of employment: Price increases, falling company profits or rising productivity. Of course, these three mechanisms can occur simultaneously. In a recent study on the introduction of the minimum wage, we found that manufacturing companies affected by the minimum wage increase prices by around 1% more than companies not affected. This is a very small effect. The main burden of the higher minimum wage was achieved through an increase in labour productivity, which was achieved through greater efficiency on the part of companies as well as increased outsourcing and a higher use of capital. We also find higher labour productivity for companies in the service sector, but cannot say whether and to what extent prices were increased due to a lack of data on prices. Economic theory would suggest that price increases are easier in the service sector than in industry, as the latter faces international competition and cannot easily pass on unilaterally increased wages in Germany to customers.

You have noticed a shift in employment towards better-paying companies as a result of the introduction of the minimum wage. What does this mean for companies that are unable to adequately increase their productivity?

Our study on the minimum wage confirms previous findings that companies affected by the minimum wage have reduced employment and companies not affected have grown. Since non-affected firms not only pay better on average, but are also more productive, such a shift can in principle contribute to an increase in aggregate productivity as a result of the minimum wage. We do indeed find that aggregate productivity in local (industrial) labour markets has increased. However, this was exclusively due to the productivity increase of existing firms and not to the relocation of employment. It is possible that the stimulus provided by the minimum wage was too small to generate positive effects of a shift to better companies on a relevant, measurable scale.

Do you believe that these productivity gains are infinitely scalable?

No, these productivity gains are certainly not infinitely scalable. In 2015, when the minimum wage was introduced, there were obviously a number of low-wage companies that had not yet fully realised their productivity potential. This is not surprising, as it is well documented that managers often shy away from the conflict and inconvenience associated with incentivising employees to perform even better. The minimum wage has meant that in some of the companies affected, this potential has had to be realised in order to survive. Accordingly, there is less room for improvement in these companies today.

However, Germany is not a country that competes on the basis of low wages anyway. If further significant increases in the minimum wage lead to companies whose business model is based on low wages leaving the market, it is reasonable to hope that the affected employees will be absorbed by better-paying, more productive companies, especially in view of the growing shortage of skilled labour.

In German social and economic policy, we usually work with absolute amounts, as is the case with the minimum wage. This often makes it very difficult to compare what a wage increase actually means for the employee. Would it make sense to use percentage increases here, for example linked to the inflation rate, by saying that after inflation of five per cent in year X, the minimum wage will be increased by five per cent in year X+1?

The percentage change in labour costs is different for every employer. If working hours remain unchanged, it is made up of the sum of the hours that people work below the minimum wage multiplied by the difference between the current average hourly wage of these people and the new minimum wage. Because some employees work between the old and the new minimum wage, the percentage increase in the minimum wage is always greater than the average percentage increase in the wages of the employees and companies covered by the minimum wage.

A link to the inflation rate increases the gap between the minimum wage and the average wage as soon as there are real, i.e. inflation-adjusted, wage increases above the minimum wage. This has been the case in most years. A link to the development of the average wage would be more comprehensible. Such a rigid link naturally deprives those involved of the opportunity to react to special circumstances such as a slump in demand for labour. I also don't see why a minimum wage commission would be needed.

Japan, for example, has a minimum wage model in which amounts are set at prefecture level. This reflects higher costs in the cities and regional peculiarities. Would such a model also be suitable for Germany - given the rapidly rising cost of living in cities?

There are no sufficiently good statistics on the local cost of living in Germany. A regulation at federal state level could possibly be implemented, but would not do justice to the large urban-rural differences within the federal states.

Where could the minimum wage in Germany be in ten years' time?

If we assume real wage growth of one per cent per year and inflation of two per cent, then the minimum wage could be around 17 euros in ten years (12.81 euros * 1.03^10). The statutory minimum wage would then be twice as high as when it was introduced in 2015.

The questions were asked by Wolfgang Sender.