Labor riddle Minimum Wage, Maximum Jobs

Economists were predicting a labor market meltdown when a minimum wage was introduced in Germany in January, but employment levels are up. Why were the forecasters so wrong?
The minimum wage has had almost no effect on the number of cleaning jobs available.

Unemployment in Germany fell by 89,000 to 2.8 million in April ― the lowest level in 24 years, the Federal Employment Office announced last Friday.

This will come as a surprise to many economists. Just a few months ago, many leading number crunchers were issuing stark warnings about the introduction in January of a minimum wage of €8.50 ($9.45) an hour. It would have a highly negative impact on the labor market, they warned.

“Above all, the minimum wage will impose a burden on the demand for labor in the area of simple activities,” wrote the Council of Economic Experts, an independent body that advises the government. The council predicted these groups would suffer “clearly negative effects in terms of employment.”

The economic research institutes forecast that the minimum wage would lead to increased unemployment at the beginning of the year.

The Institute for Economic Research in Munich warned that the minimum wage will “put as many as 900,000 jobs at risk.” A study commissioned in December by Initiative New Social Market Economy, an employer-financed NGO, put the figure at between 250,000 and 570,000.

It is clear that numerous economic institutes and politicians had a fundamentally mistaken appraisal of its effect. Peter Bofinger, Member of Council of Economic Experts

In particular the new wage law would have a “devastating effect on youth unemployment,” said economist Axel Börsch-Supan.

How wrong they all were: The widely feared rise in unemployment hasn’t happened. Developments in the year’s first months were better than normal. “Up to now, there are scarcely any indications of undesired side effects of the minimum wage on the labor market,” said Enzo Weber, of the Institute for Employment Research, last week.

But the economists are not admitting defeat just yet. “Strong growth is hiding the effect of the minimum wage on unemployment,” said Germany’s leading economic research institutes in a joint diagnosis.

Ronnie Schöb, an economics professor at the Free University of Berlin, added: “Developments in the labor market are extraordinarily positive. This tends to conceal possible effects of the minimum wage.”

To get an idea of the state of the labor market since the introduction of the minimum wage, in March Lars Feld, a member of the Council of Economic Experts, called for an investigation into individual business sectors, for example taxi drivers.

It found that for all occupations, the number of unemployed in November was 3.2 percent lower than a year previously. Unemployment has continued to decline at about the same rate as before the introduction of the minimum wage.

For taxi drivers, cleaners and security personnel, there was little or no change in the rate of decline in unemployment from November to March when compared to the previous year, just as in the labor market in general.

 

However, there was marked improvement in the same period for restaurant and hotel staff, post office workers, delivery workers and hospital and elderly-care nurses. There were no striking developments with regard to young people, whom critics of the minimum wage had identified as its most likely losers.

The Council of Economic Experts says such analysis doesn’t prove its prediction was wrong. “In its forecast, the council proceeded from the assumption that in 2015 there would be around 100,000 fewer mini-jobs and some 40,000 jobs requiring the payment of social insurance less than would have been the case without the minimum wage,” it said.

“In order to evaluate the observed impact of the minimum wage on employment, it is in no way enough to undertake a before-and-after comparison. What is instead required is a contrast to the development in the labor market that would have occurred under the same economic conditions without the minimum wage.”

Mr. Börsch-Supan agreed, arguing that the analysis did take into account differences between the labor-market trends for young and old people. “Minimum wages are less damaging in a booming labor market than in a stagnating one,” he said.

However, Peter Bofinger, a member of the Council of Economic Experts who took the minority position over the effect of the minimum wage, feels vindicated. “It is clear that numerous economic institutes and politicians had a fundamentally mistaken appraisal of its effect,” he said.

The war of words is likely to continue.

 

Norbert Häring is a Handelsblatt editor focusing on monetary policy and financial markets. To contact the author: [email protected]