A Fount of Bad Ideas

Germany's former chancellor Bismarck invented, or rather extended, the welfare state (which was however indeed a German invention; there were forerunners of it as early as 1840 in Prussia and Saxony). Bismarck wanted to bind workers to the State – the welfare state fit right in with his authoritarian instincts, as he figured it would create an army of state-dependents. Not surprisingly, he was also fully devoted to mercantilism and protectionism.

This happened around the same time when Germany gave the world the "socialists of the chair", i.e., luminaries such as Gustav von Schmoller, Werner Sombart and other historicists, as well as communists like Marx, Engels and Kautsky. Radical German nationalists began to grow in stature and power in this period as well, and would eventually prove to be Germany's downfall. Germany was a frightful fount of economic and social error at the time (this is not to say that everything was bad about Germany in this time period – but obviously, the country soon went off the tracks in a major way).

The timing of the welfare state's nation-wide introduction is no surprise in light of this. One bad idea was following hot on the heels of another. With various groups in the country influenced by radical ideologies, united only in their rejection of classical liberalism, Germany slowly but surely descended into madness and chaos, ultimately leaving the country a pile of rubble after WW2.

 

640px-Otto_von_Bismarck

Germany's autocratic chancellor Otto von Bismarck – his only saving grace was his very careful foreign policy. Under his leadership, WW1 would likely not have been started. Other than that, he was a statist, mercantilist and authoritarian, who even engaged in religious persecution (however, his attempt to suppress Catholicism in the German Reich eventually backfired dramatically).

(Image via Wikimedia Commons)

 

We have already written about the fact that Germany got very lucky right after WW2, in that there were a few years during which the free market and the ideas of liberalism suddenly enjoyed significant support. While the interventionist state soon reasserted itself again, those few years definitely did wonders for the country's economic resurgence (for details on this see “Germany Elects Mama – the Real Winner is Socialism” as well as “Germany to Gamble on Stimulus”. In both articles you will need to scroll down to the second half where the post-war situation is discussed in some detail).

In spite of speedily resurrecting the trappings of welfare statism after this intermittent period, the country somehow managed to dodge a specific bullet. Germany never implemented a minimum wage, which has helped to produce very high levels of institutional unemployment in many other European countries. When chancellor Schröder enacted his labor market reforms, he was able to concentrate on other issues. The result was that the “sick man of Europe” has become “Europe's economic locomotive”. In retrospect, Schröder was a very courageous politician: his reforms ultimately cost him his job, as the positive effects of his reforms arrived with a considerable time lag, well beyond the election cycle.

 

A Historic Mistake

On Thursday, Germany has finally decided to adopt a minimum wage. The socialists insisted on it as a precondition for their joining and supporting the governing coalition. Never mind that the country has always done well without a minimum wage. Due to its high labor productivity, wages were always quite high anyway. However, some low skilled or unskilled workers certainly were paid less than the minimum wage that was adopted on Thursday. Many of them will likely lose their jobs.

The minimum wage is €8,50 per hour. Why €8,50? Why not €7,50, or €8 or €9 or €9,50? No-one knows of course, because there is no way anyone can calculate the "proper" minimum wage. In fact, the law is full of exceptions (certain industries and age ranges are e.g. excepted, some industries have been granted a "grace period", etc.), which already tells us that the authors of the legislation are to some extent aware of the economic damage it will cause. After all, if there were no adverse consequences to be feared, why would there be a need for exceptions?

What we know for certain is only this: in an unhampered market economy, there would only be voluntary unemployment. There would also be no way for a company to pay workers "less than they are worth", since it would have to compete with other companies for workers. Labor is a scarce resource – as long as there is more land than labor on earth and there remain unfulfilled consumer wants, there will be work for all who want it. If labor is under-priced for some reason, competition between companies will eradicate the discrepancy. Economic logic tells us that if a minimum wage is introduced, at least some people will become involuntarily unemployed because of it. This is what is referred to as institutional unemployment.

Let us not forget that the minimum wage also infringes on human liberty and dignity, because it will force a number of people to either join the illegal "shadow economy" or become dependents of the State, begging for hand-outs.

Of course, most people in Germany earn more than this minimum wage anyway.  Labor is a relatively non-specific factor, but it is certainly anything but a homogeneous blob. A skilled worker could certainly perform an unskilled job as well – in reality though, most Germans can be assumed to be employed in line with their level of skill. Most of them therefore likely earn more than the new minimum wage. The problem is the people whose output is worth less in the marketplace than the minimum wage and who are both willing and able to work for less. They will perforce join the ranks of the unemployed, whether they like it or not.

We are well aware that there exist many studies that attempt to prove that minimum wages do not harm employment (obviously, no study can never disprove that minimum wage laws are an infringement on the liberty of workers and employers to freely bargain). There are just as many studies that try to prove the opposite. However, empirical data can never prove or disprove an economic theorem.  If an economic theorem is faulty, this can only be shown by deductive reasoning.

Since economic history is always unique, contingent circumstances may obscure for a time that the introduction of a minimum wage is costing jobs. As Bastiat pointed out though, it is not enough for economists to consider only that which can be seen – they must also consider that which cannot be seen.

Here is what Sigmar Gabriel, the leader of Germany's socialists, said after the legislation was passed:

 

“SPD chairman  Sigmar Gabriel called the vote in Germany's Bundestag [parliament, ed.] over the minimum wage a "historic day for Germany". “In retrospect, this decision will be rated as having marked major social progress”, Gabriel said. “Collective agreements, fair wages, worker participation and trade unions were opposed far too long.  Today is a turning point in this trend”, Gabriel declared further. The minimum wage of €8,50 imposes a downside limit.”

 

sigmar-gabriel

Sigmar Gabriel, leader of Germany's socialist party.

(Photo source: DPA)

 

Collective agreements and unions were "opposed far too long" in Germany? Perhaps in some parallel universe, but definitely not in the Germany in this universe.  To give readers an idea as to how much heft the German unions possess, consider that in 2011, the average wage of a worker in Germany's car industry was approx. $67/hr., compared to $33/hr. in the US (Germany's metal workers union is an especially powerful union).  However, let us also look at averages:

 

costs compared
US and German factory workers compared. What this graphic doesn't show: German workers have between 34-37 paid vacation days and holidays per year, and on average retire 5 years earlier than US workers. Moreover, the monthly salary is as a rule not paid 12 times per year, but 13 times, in some cases even 14 times – via Huffington Post – click to enlarge.

 

Does this look to anyone as though there were "no fair wages" in Germany, and that the demands of labor unions were "opposed far too long"?

Labor unions have of course a special interest in pushing for minimum wages. They don't care about those who will end up unemployed – they only care about their members. The imposition of a minimum wage is a form of cartelization from the unions' perspective: it destroys competition in the field of labor with the help of the State's powers of coercion and compulsion.

 

Conclusion:

A price will eventually be paid for this step. Sigmar Gabriel is right about one thing: it is a "historic event". However, not because it marks "social progress", but because it is a historic blunder. Once a minimum wage is instituted, the cries for hiking it will never cease. Don't be surprised if sooner or later, Germany becomes Europe's “sick man” again.

 

 

 

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10 Responses to “Germany Rolls Back Labor Reforms”

  • It isn’t the government that raises wages through fiat, but the supply of labor itself. In theory, labor provides all income through society, other than what is added to it through capital improvement. Thus to support unemployment, money is taken from both labor and capital, thus reducing the output of capital in the future and the income of labor in the present. In an economy where it was necessary to work in some capacity, unless one had resources not to work, people would find something to do and in order to hire someone, the market would have to bid enough for one to leave their current profession for another. A bar on low pay for employment actually provides a pool of unemployed workers, who show up to bid against each other, when employment becomes available and that in itself keeps all wages down.

    Now that the Germans have stepped over the line, the next game will be to push the minimum wage higher, to a point it will produce unemployment. Next, you will see the wages of autoworkers fall and others as well, as employment that might otherwise happen in Germany will move to Turkey or somewhere else. Wages will be replaced by credit expansion, as we have seen in the US and money will flow overseas, as it always does when credit replaces income. Germany will then begin to look like Italy.

  • Kreditanstalt:

    “Minimum wages”, together with widespread and expensive tax-funded social programs, serve to protect high salaried labour from wage competition from below.

  • Viator:

    The Germans are on a roll….

    “Germany Bans Fracking Until 2021, Caves In To Green & Russian Lobbies”

    “There won’t be [shale gas] fracking in Germany for the foreseeable future,” German Environment Minister Barbara Hendricks (SPD) said Friday in Berlin. The government’s planned regulations come amid a political standoff with Russia, Germany’s main gas supplier, and following intensive lobbying from environmentalists”

    The Wall Street Journal, 4 July 2014

  • 123dobryden:

    will this benefit imigrants or germens?

  • herepog:

    Capital of course has a special interest in pushing for the lowest possible wages. It doesn’t care about those who will end up unemployed – it only cares about its profits.

    • No6:

      Read the article again.

    • worldend666:

      Very clever, but capital doesn’t purport to represent the interests of workers. Capital is a provider of work to those who would have it. Take it or leave it, it’s the worker’s decision. The unions on the other hand seek to force parties to act against their will through legislation or face jail.

  • No6:

    Corpulant Sigmar Gabriel, clearly a good living can be made wrecking other peoples lives.

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