T2-08: Minimum wage: Enforcement and compliance

Frederic Hüttenhoff, Institute for Work, Skills and Training, University of Duisburg-Essen
Claudia Weinkopf, Institute for Work, Skills and Training, University of Duisburg-Essen

» Full paper: ilera-2019-paper-144-Huttenhoff.pdf

The statutory minimum wage of 8.50 € in Germany had been introduced in January 2015 after more than a decade with very controversial debates. Moreover, in a couple of industries employer associations and unions have agreed upon sector-specific minimum wages typically far above the statutory minimum wages in Germany. In our paper, we raise issues of compliance and enforcement based on a review of the broad international literature on issues of compliance and enforcement of labour standards on the one hand and on findings of a 3-year qualitative research project funded by the Hans-Boeckler-Foundation (HBS) on the other hand (Bosch et al. 2018).

The Financial Control of Illicit Employment (Finanzkontrolle Schwarzarbeit - FKS) is responsible for monitoring the compliance with the statutory minimum wage and the higher minimum wages agreed upon in several sectors in Germany. However, there are repeated indications that the current control strategy and personal capacities of customs authorities are not sufficient to detect and penalize infringements effectively. It is also frequently critisized that employees in Germany still have to assert their wage claims at courts on an individual basis. Although the trade unions provide important support, this is completely lacking from the state. Experience at home and abroad shows, however, that the acceptance of minimum wages by companies is strongly influenced by whether they are effectively observed and enforced.

International studies on the strategies of supervisory authorities responsible for monitoring compliance with minimum wages have shown that strategic enforcement is important to achieve the largest and most sustainable changes in corporate behaviour with limited resources (Weil 2010 and 2015). The aim is to encourage leading companies to set and control internal standards that must be followed by subcontractors along the value chain (Hardy/Howe 2015). In addition, “cooperative enforcement” with an involvement of public, private and civil society actors and associations has proved to be more effective compared to separate enforcement solely by state authorities (ILO 2013; Amengual/Fine 2017).

Our qualitative study focused on three industries – construction, hospitality and meat processing. All three sectors have been included in the Act to Combat Illicit Work (Schwarzarbeitsbekämpfungsgesetz) and are subject to special monitoring by the FKS. Despite different conditions and structures, all three sectors face similar problems in terms of compliance with and enforcement of minimum wages. In particular, inaccurate information on working hours and unpaid overtime (as well as unpaid pre- and post-work) are important gateways for non-compliance with minimum wages. In addition, various deductions from wages, e.g. for "bad work", working materials or board and lodging, also prove to be recurring problems. In our paper, we will name approaches how the control, observance and enforcement of minimum wages can be more successful.

Literature

• Amengual, Matthew / Fine, Janice (2017): Co-enforcing labor standards: the unique contributions of state and worker organizations in Argentina and the United States. In: Regulation and Governance 11 (2):  129-142.
• Bosch, Gerhard / Hüttenhoff, Frederic / Weinkopf, Claudia / Kocher, Eva / Fechner, Heiner (2018): Kontrolle und Durchsetzung von Mindestarbeitsbedingungen: Einhaltung von Mindestlohnansprüchen am Beispiel des Bauhauptgewerbes, der Fleischwirtschaft und des Gastgewerbes. Düsseldorf: Hans-Böckler-Stiftung. Forschungsförderung Working Paper Nr. 95. https://www.boeckler.de/6299.htm?produkt=HBS-007033
• ILO (2013): Labour inspection and undeclared work in the EU. LAB/ADMIN Working Document No. 29. Geneva. https://digitalcommons.ilr.cornell.edu/intl/275/
• Hardy, Tess / Howe, John (2015): Chain Reaction: A Strategic Approach to Addressing Employment Non-Compliance in Complex Supply Chains. In: Journal of Industrial Relations 57 (4): 563-584.
• Weil, David (2010): Improving Workplace Conditions through Strategic Enforcement: A Report to the Wage and Hour Division. https://journals.sagepub.com/doi/abs/10.1177/0022185618765551
• Weil, David (2015): Strategic Enforcement in the Fissured Workplace. John T. Dunlop Memorial Forum. Harvard Law School.

Florian Spohr, Ruhr University Bochum
Simon Ress, Ruhr University Bochum

» Full paper: ilera-2019-paper-161-Ress.pdf

This contribution scrutinizes how the 2015 introduction of a general minimum wage in Germany impacts on German trade unions’ membership by applying a difference-in-differences model on entries in and withdrawals from DGB affiliated unions.

The introduction of the statutory minimum wage in Germany in 2015 was a deep intervention in the autonomous negotiation of wages and working conditions by the trade unions and employer representatives. The ‘Act on the Strengthening of Free Collective Bargaining’ (Tarifautonomiestärkungsgesetz) was implemented in order to guarantee a decent hourly wage for the employees on the one hand and – according to its name – to strengthen the social partnership.

Trade unions welcomed the introduction of the statutory minimum wage and claimed it as a success of their mobilization efforts, which is remarkable regarding that until the early 2000s they rejected a statutory minimum wage because of its undermining effect on their claim to be the exclusive agent of workers’ interests. However, at least since the so called Hartz-reforms were taking effect in the mid of the 2000s, the low-wage sector enlarged rapidly and all efforts to strengthen the position of the unions in this sector could not substantially improve the working conditions and payments in some segments of the labour market. Without the power to directly exert pressure on the employer representatives in collective bargaining, the unions widened their repertory and started to advocate the introduction of a general statutory minimum wage in Germany. This action conflicts not only with the principle of autonomous wage setting by social partners, but also with the narrative that unions focus merely on their members’ benefits because the union density among workers who earned less than the proposed minimum wage was marginal.

This contradiction is resolved in a wider view according to which unions recognized that their (potential) members called increasingly for a statutory minimum wage as a political project. Thus, unions incrementally realigned their interest towards the introduction of a minimum wage in order to increase their attractively for old and new members in a time of decreasing number of trade unionists.

In consideration of the positive expectations of the unions regarding to the impact of their support of the minimum wage on membership development, the question arises if the empirical data matches these expectations. This paper seeks to answer this by the investigation of the patterns of entries in and withdrawals from unions of the Confederation of German Trade Unions (DGB) before and after the introduction of the general statutory minimum wage. Based on representative data from the panel ‘Labour Market and Social Security’ (PASS), a conditional logistic difference-in-differences propensity score model is used to isolate the effect of the minimum wage introduction on the fluctuation of union members.

Overall no causal effect of the introduction is found for the probability of leaving a union by people in the low-wage sector. However, a causal effect on the probability of entering a union is detected. The new minimum wage law reduces the likelihood by about half for employees in this sector. Based on this results, this study reveals that unions’ support for the minimum wage did not increased their attractiveness for the workers who directly benefited of its introduction. Contrary the odds to strengthen their position in this segment of the labour market decreased.

Toralf Pusch, Institute of Economic and Social Research (WSI), Hans-Böckler-Foundation

In comparison to other European countries, Germany has one of the largest low-wage sectors (Deutscher Bundestag 2017). Currently, about 22% of employees work in the German low wage sector (Kalina / Weinkopf 2018). Against this background and the declining collective bargaining coverage since the 1990s, the minimum wage was introduced on 1 January 2015 after years of political discussion. Nonetheless, the minimum wage is a low wage. In the year 2019, too, the statutory minimum wage of € 9.23 remains below the low-wage threshold in Germany, which currently can be assumed to be between € 10.50 and € 11.00. In this respect, it is not surprising that there was hardly any decrease in low-paid employment as a result of the introduction of minimum wages (Kalina / Weinkopf 2018).

Although the statutory minimum wage in Germany probably did not lead to a lower prevalence of low-paid employment, this does not mean that the minimum wage had no distributional effects. Results for Germany so far have mainly considered hourly wages. Significant increases in hourly wages were found at the lower end of the wage distribution, although not all workers entitled to the minimum wage were yet able to reach it (Amlinger et al 2016, Burauel et al 2017, Pusch 2018). However, the distributional effects of the statutory minimum wage on monthly income and household income must be distinguished from its effects on hourly wages. Firstly, reductions in working hours dampened the impact of hourly wage increases on monthly wages (Caliendo et al. 2017b). In addition, even rising monthly wages cannot be directly linked to rising household incomes, for example if the introduction of minimum wages has lead to job losses. In addition, the tax and levy system (for example, decreasing social incomes) in the case of rising monthly wages may cause household incomes to rise less then monthly wages (OECD 2015, p.50, Manning 2013, Dube 2017).

Currently, there is no comprehensive study on the effects of the statutory minimum wage on household incomes in Germany. Noteworthy are the results of Bruckmeier and Becker (2018) who found a slight decline in the risk of poverty among employees in sectors with a high minimum wage incidence, especially in eastern Germany. However, the measured effects are not robust across all specifications and not always significant. Related to the question of the effect of the minimum wage on the risk of poverty is the question of the effect of the minimum wage on the number of “Aufstocker”, which earned a low wage income in addition to the remuneration Hartz IV benefits. While Bruckmeier and Becker (2018) found hardly any effects, Schmitz (2017) could find slight reduction in the number of posts due to the minimum wage. On the other hand, income losses may be incurred on the entrepreneurs affected by the introduction of minimum wages - especially the self-employed with few employees (Döhrn 2014). Descriptive findings (Mindestlohnkommission 2018) and causal investigations (Bossler and Hohendanner 2016, Bossler et al., 2018) do not indicate a relevant effect of the minimum wage for the number of self-employed persons. However, Bossler et al. (2018) found a negative impact on the profit situation in the firms affected by the minimum wage.

While the influence of the statutory minimum wage on the distribution of household incomes in Germany has so far not been studied extensively, international literature offers more results. Part of international research focuses on the impact of minimum wages on risk of poverty, with mostly minor effects being shown (Belman and Wolfson 2014, Dube 2017, Neumark and Wascher 2008, Card and Krueger 1995, Manning 2013). However, distinguishing the question of the impact of minimum wages on the risk of poverty is the effect of minimum wages on the general distribution of household incomes. As stated by the OECD (2015, p. 49), many minimum-wage recipients do not live in poor households. A clearly positive effect of minimum wages on household incomes has been shown for the US in a recent study by Dube (2017). In addition, Dube (2017) cites 13 other studies for the US that show predominantly positive elasticities of poverty risk and / or household incomes with respect to minimum wage variations (e.g., Card and Krueger 1995, Addison and Blackburn 1999). Neumark et al. (2005) is the only contribution that marks a poverty-increasing effect of minimum wages. There are also indications for the UK of positive effects of minimum wages on household incomes (Cribb et al., 2018, ch. 6, Sutherland 2001). Similar to Germany, the effect of income increases linked to the minimum wage is dampened by the tax and levy system also in the UK (Brewer and De Agostini 2017, Brewer et al., 2009).

To test minimum wage effects on household incomes, Difference in Difference (DiD) estimates of household income are conducted for the years 2015…2017 using the PASS database supplied by IAB. For the estimations, two measures of relative minimum wage impact are being used in the sense of a robustness check. The first one is the regional depth of intervention of the minimum wage (state level). The second is the distance of the individual hourly wage from the minimum wage before its introduction. Spillover effects are checked in the latter specification and the control group is delineated accordingly. Other control variables, such as regional trends in economic development, are also added. In order to test the impact of the minimum wage on self-employment income, approximate estimates are made with measures of minimum wage impact on smaller holdings in the IAB Establishment Panel. The presentation of the causally interpretable effects is supplemented by descriptive findings and developments.