Early this year, a new minimum wage came into practice in Germany, a measure which is estimated to benefit 3.7 million German workers. The consequences this will have are not clear and it is still too early for it to have a significant impact. In general, however, it is believed that it will boost investments in machinery.
An important argument against a minimum wage is that companies will therefore invest more in machinery and automation to reduce labour costs. A study by Duke University conducted among CFOs worldwide revealed a clearer picture. In general, companies tend to invest in machinery when labour costs increase. The minimum wage, which is intended to protect low-paid workers, actually becomes a threat, as their jobs usually require low skills and can be easily replaced by machines.
The study also shows that there is a specific tipping point beyond which investing in automation becomes more attractive, which according to researchers, is a minimum wage of ten dollars per hour. "Labour-saving techniques have dramatic and permanent consequences," said Professor Harvey. "If these jobs are lost, they will not come back." A too high minimum wage leads to automation becoming a competitive advantage.
Furthermore, researchers conclude that, in Europe, a 40% increase in the minimum wage, which would entail going from 7.25 to 10 dollars per hour, would lead to layoffs at 37% of companies. Nearly 70% say they would advertise fewer vacancies. But more importantly, nearly 60% of companies would enforce measures to reduce labour costs, including investments in machinery.
Incidentally, the minimum wage in Germany has been set at 8.50 Euro per hour, which, when converted, is still below the tipping point of 10 dollars per hour. In November, Joan Berkvens, of CPS, said she expects German companies to invest more in machinery in the longer term.
Ultimately, the economic prospects for Germany in 2015 are good, with the European Union recently predicting a 1.5% growth. The minimum wage should have little impact on the country's economic development, mostly when it comes to employment. The unemployment rate in Germany stands at 4.8%, which is extremely low compared to the rest of Europe. On average, 10% of Europeans are unemployed. The fact that most Germans have money at the end of the month in their accounts is positive, as this helps boost domestic spending.