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Weekly Economic Briefing

Europe

Paying workers the minimum

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In the Eurozone, there is no standard minimum wage across member states. Indeed, three countries do not have a national minimum wage at all – Austria, Italy and Finland – while Germany only introduced its federal minimum wage in 2015. Eurostat’s purchasing power standards (PPS) – an artificial currency unit that reflects price-level differences across countries using PPPs – allows us to assess the differences in minimum wages in terms of actual spending power in the countries that have a national minimum wage in place. Through this lens, data from the first half of 2017 show that Germany, Belgium and the Netherlands have the highest levels of minimum wages in the Eurozone – also beating their UK and US counterparts – while peripheral countries Portugal, Greece and Spain lagged the pack (See Chart 6). That said, both Spain and Portugal saw an uptick in minimum wages in the first half of 2017, rising 8% and 5% respectively since H2 2016. Greek minimum wages on the other hand have fallen 15.5% since their highs in H1 2012; making Greece the only country to have a lower minimum wage today than it did before the crisis, in euro and PPS terms.

One man's minimum... Wage wedge

The impacts of minimum wages are a source of debate among economists, policymakers and voters. Proponents argue that national minimum wage policy can address income inequality and boost productivity, while critics point to the risk that minimum wages generate downward pressure on employment. Arguably, both sides are a little bit right. Minimum wages can help to increase the salaries of the lowest paid. However, in terms of redistribution and lifting families out of poverty, the effect is imperfect because many of the poorest families have nobody in work to begin with while, for example, young workers from middle-class households often see the benefit. On top of that, the OECD has highlighted the importance of low working hours driving in-work poverty as well the effect of taxes on take-home pay (see Chart 7). It is encouraging then to see newly elected French President Macron’s reform agenda including both a reduction in the sizeable social contributions to boost take-home pay and a commitment to penalise zero-hours contracts to boost hours worked.

What about the claims regarding the negative effects minimum wages can have on employment? A review of studies by Neumark (2015) suggests that minimum wage rises of around 1% can lead to a modest reduction in employment of affected workers of around 0.2%. Germany’s implementation of a national minimum wage in 2015 provides us with an interesting case study. The German Institute for Employment Research found that the minimum wage had no significant impact on employment, with regular employment gains almost entirely offsetting marginal part-time employment losses. Of course, this work is based on the first year of minimum wage implementation and does not account for the 4% wage increase introduced in 2017, so further effects have yet to be felt. Nonetheless, the Germany labour market appears to have absorbed the change well in aggregate through 2017, with overall harmonised unemployment at a record low 3.9% and employment growth picking up to 1.5% year on year (y/y) in Q1 of this year. The true test might come when Germany enters its next downturn.

Stephanie Kelly, Political Economist