FT.com / Companies / Transport - Germany's pay debate is little short of demagogic

FT.com / Companies / Transport - Germany's pay debate is little short of demagogic

Germany's pay debate is little short of demagogic
By Michael Burda

Published: December 18 2007 02:00 | Last updated: December 18 2007 02:00

The past few weeks have been challenging for economists who deal with Germany. First, the parliament just passed a minimum wage for postal workers. Second, the country is in the grip of a national discussion about excessive managerial pay. A number of politicians have argued for caps on executive pay: maximum wages. Because the quality of economic discourse on these issues is so abysmal, one may need to think twice about whether Germany has made any progress on labourmarket reforms.

Germany does not have a minimum wage like the US, the UK, or France. So why give postal workers special treatment? Under certain conditions, the government can declare collectively bargained wages to be binding for all workers. This mechanism is rarely invoked, because the necessary conditions for such a declaration do not usually hold. In particular, they do not exist in sectors where wages are declining the most - where competition from foreign workers is the greatest. The construction and facility-management sectors have been under particular pressure. In response to growing criticism from the unions, the Entsendegesetz was passed in 1996 to set minimum wages and working conditions for foreigners employed in Germany by foreign contractors. While it is generally legal for European Union nationals to work in Germany under the EU treaty, the fact that eastern Europeans were willing to work for wages significantly below collectively bargained wages was a source of tension. The law has now been invoked to extend a minimum wage to all workers in mail delivery.

Eastern Europeans do not work in German post offices. In fact, German postal workers have tended to do pretty well in the food chain. As of next year, the postal monopoly will be relaxed, allowing private companies to compete head-on with the Deutsche Post (a DAX-listed company with 500,000 employees). Because German mail carriers still earn civil servant salaries, their jobs will be threatened by workers employed at lower wages by private companies such as PIN and TNT. Put differently, the Entsendegesetz is serving as a Trojan horse for a German minimum wage and will probably lead to the elimination of thousands of jobs in the private mail delivery sector. The labour minister Olaf Scholz announced over the weekend that more minimum wages were on the way in other sectors - temporary help agencies, meatpacking, gardening, beauty salons and bakeries, to name a few.

What about those maximum wages? While sometimes hard to distinguish from envy, the debate reveals a lot about the economic sophistication of politicians, the media and the public. Rather than asking the economic question - why do workers in low-skilled occupations earn so little and managers so much? - the knee-jerk response has been to call for state intervention.

The discussion has become demagogic. The unions are trying to divert attention from their failure to organise the poorly paid and to raise their wages, as well as their inability to retain the loyalty of high-skilled workers such as doctors, airline pilots and locomotive engineers. While it is true that many managers earn exorbitantly high salaries even if they perform badly, there remains the "managerial law of large numbers". Deutsche Post paid roughly €18.6bn in total compensation in 2006, or about €37,000 per employee. Senior management earned €10m of base pay in the same year. Getting rid of the senior management would yield the average worker at Deutsche Post only about €20 a year. The company would then be adrift without a management team - not a pleasant prospect if you are working for a salary at Deutsche Post.

If Germany really wants to put a cap on managerial pay, it should bring back high and progressive income taxes, such as those imposed in Denmark and Sweden. Yet Germans will have to live with the consequences: the best talent will migrate to countries with lower tax rates. This might have the unwanted consequence of driving abroad a number of top sports stars. An alternative solution might be simply for shareholders to impose the same rules on managers that are imposed on professional athletes who earn comparable salaries. Hire at will, no employment protection, performance-related pay, no golden parachutes and no adjustable stock options. Why treat Josef Ackermann, the chief executive of Deutsche Bank, any differently to Michael Ballack, who plays for Chelsea football club and earned roughly the same salary in 2006?

The writer is professor of economics at Humboldt University, Berlin
Copyright The Financial Times Limited 2007