Coalition negotiations between Merkel's CDU/CSU Union and the SPD will begin shortly. One of the major issues was the minimum wage of €8.50 per hour, that the SPD wants. Many German economists fear that jobs will be lost. They are right that this might be the case in the short term but in the long run they are absolutely wrong.
The Agenda 2010 reforms in the last decade created a gigantic low wage sector in Germany. A simple way to estimate who is affected by this is by setting a threshold at 2/3 of the median wage. According to this definition 24.1 percent of the total workforce received a low wage in 2010. The country has the second biggest low wage sector on Europe, according to the IAB (Institute for Employment Research). But, for Germany the threshold stands at €9.54 which is in fact higher than in many other countries covered by the study(Britain €8.12 - France €8.51 Denmark €15.80).
A minimum wage of €8.50 would make it impossible to pay less than 60 percent of what the average worker gets, well below the threshold. Why would people in Germany even accept such a low wage which is clearly not enough to make ends meet? Well, that brings us back to the reforms mentioned above. They put significant pressure on the long term unemployed by forcing them to accept any job or have their benefits reduced. To help them make a living a so called "Aufstocker" scheme was created. Workers in the low wage sector receive benefits even if they have a full time job that pays very low wages. Around 9 percent of the off all recipients of long term unemployed benefits are in the situation that they make more than €800 but still need benefits.
On the one hand, the former left-wing party SPD created a scheme which subsidises predatory business models both by guaranteeing the employers a constant stream of new workers and by increasing the pay of the employees. So, a minimum wage would wipe out this business model completely and thereby cause higher unemployment in the short term. In the long term the negative effects will be easily manageable since most service sector jobs, which pay very low wages, cannot be moved to other countries (hairdressers, waiters and so on).
On the other hand, Germany is still a very divided country on wages. In the eastern states people earn significantly less than in the old states. €8.50 might be too high there, also newly created businesses might struggle with high wages for a while, even if the model can in the end create meaningful employment with an acceptable wage.
I think that €8.50 is a good idea in western Germany but in the east it should start out lower and be increased on a yearly basis to close the gap over say five years. Also new businesses should be given two years before they have to pay the minimum wage (measures would be needed to prevent people from creating the same firm over and over again). Other than that it is good that the parties have agreed in principle to a minimum wage. Now we will have to see what the compromise will be on euro zone policy. It will be the most important job of the next coalition to take steps that the euro zone can finally return back to meaningful growth.