Wages and salaries: the fallacy of growing inequality

METERIn the middle of work, Germany runs an invisible line. This line divides the country in two halves, but it also connects: the average income quantifies what a normal employee of half of society earns, and divides the employees into two equal parts. Half have more wages and salaries, the other half less. The median thus outlines “normal” German in its economic possibilities and limits.

In addition to the much-noted median earnings, there is another important measure: the extent to which wages at the top end exceed earnings at the bottom end of the workforce. Developments in the 1990s and early 1990s led to the idea that the wage gap between the highs and the lows was widening. Economists call this the “wage differential.”

In Germany, however, one cannot speak of a growing inequality in wages and salaries. The data now presented by the Federal Statistical Office rather shows that the gains at the upper and lower end are converging in this country. According to Wiesbaden statistics, the income gap between low- and high-income people narrowed between 2014 and 2018, but did not widen. The earnings structure survey includes data from around 60,000 companies that need to be evaluated. The trend during these four years is clear.

If people with high incomes were 3.48 times the gross hourly rate of workers with low wages before the introduction of the minimum hourly wage, the differential has been reduced to 3.27 times in 2018. “The introduction of the wage Overall minimum seems to be a very important reason for compression, “says economist Dominik Groll, head of the labor market at the Institute for World Economy in Kiel (IfW Kiel). The national minimum wage came into force on January 1, 2015 and is currently 9.35 euros per hour.

According to the data, the minimum wage is having an effect especially in the east of the country. “Particularly among low wage earners, an equalization of the income gap between East and West Germany can be observed,” says the Federal Statistical Office. Low earners make up the bottom 10 percent of the pay scale, while those with higher wages make up the top 10 percent. In the latter, convergence between East and West cannot be observed.

“If you look at the hourly wage statistics, the minimum wage works,” says Alexandra Fedorets. She is a labor market expert at the German Institute for Economic Research (DIW) in Berlin and has examined the effects in detail. If the effect is greater in the new federal states than in the old Federal Republic, this has to do with the fact that the low-wage sector is more pronounced in the east.

“Wage inequality in Germany is falling,” says the economist. Overall, this is a positive development. DIW identified the peak of the spread in 2013.

Hourly wages increased, but working hours decreased

But Fedorets has also observed that rising hourly wages don’t paint the whole picture. “It looks different with monthly and annual salaries,” says the expert. Companies, especially in structurally weak areas, have reacted in part to rising wage costs by reducing working hours. That means: employees in the low-wage sector earn more per hour. But since they now work less, the improvement is hardly reflected in monthly or annual income.

Other economists emphasize that, in the long run, workers must always deliver productivity that matches wage costs. If they don’t, your business will lag behind the competition. Therefore, there appears to be some shift in jobs from smaller to larger companies, which tends to allow for productive work.

The fear that the minimum wage will lead to higher unemployment has not been realized until now. However, the introduction fell into a phase of economic recovery: between 2014 and 2018, the unemployment rate fell from almost seven to five percent, and the number of people looking for work fell by more than 500,000 people. “So far, the outlook has been optimistic,” says Fedorets. It remains to be seen how the situation will develop after the Corona crisis.

It is indisputable that many companies that pay minimum wages are at home in industries that are most affected by Covid-19 and quarantine measures. Data from the Federal Statistical Office show that more than half of those who work in restoration have to get by on less than twelve euros. In the cleaning professions, the average earnings are also less than twelve euros. In the hotel industry it is just under 13 euros.

“We currently have a lot of reduced work time in the restaurant industry. That catches a lot for a while, ”says Christoph Schröder from the Institute for German Economics (IW). We have to see if the minimum wage will cause problems in the aftermath of the recession and beyond.

Furthermore, a reduction in the wage differential is not entirely positive from an economic point of view. There are effects that could be unfavorable for individual employees and companies. Among other things, he notes that advanced training is sometimes no longer attractive to the unskilled.

Pay inequality can also represent a differentiated economy in which highly skilled people, for example in the software and IT sectors or in research and development, design products that are sold around the world. A locally anchored farm or wood processing company, for example, has a hard time keeping up with its added value. The regional economic structure is always reflected in the income structure.

Despite all the rapprochement, there is still a wage gap between East and West Germany. For the new federal states, the statisticians place the median hourly income at around 14 euros, in the states of the territory of the former federal republic it is 17 euros.

In percentage terms, the gap has narrowed in the four years to 2018, but is still substantial in a good fifth. In 2018, 29 percent of all employees between the Baltic Sea and the Metallic Mountains were still below the low-wage threshold. In West Germany, including Berlin, it was 20 percent.

“Compared with 2014, the share in the east has decreased significantly by 5.4 percentage points, while it has increased slightly in west Germany by 0.7 percentage points,” says the Federal Statistical Office. In contrast, there are almost twice as many workers in the high-wage sector in the West (22.3 percent) as in the East, where it is only 11.2 percent.

That won’t go away for the foreseeable future. “There are also structural differences that have not been completely overcome,” says Fedorets, an economist at DIW. What is lacking in the new federal states are mainly those medium-sized but highly successful companies that, as “hidden champions”, make Germany successful on world markets.

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