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Wall Street Journal

In: Business and Management

Submitted By swapnakarmarkar
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Minimum Sense
By HANS-WERNER SINN
April 30, 2007
While the German economy is finally booming again and employment rising rapidly, the situation of the low-skilled and long-term unemployed remains difficult. Their wages, if they can find a job at all, have come under increased pressure in recent years due to the extensive outsourcing and offshoring activities of German firms. They are the obvious victims of globalization. As the ex-Communist countries and India, accounting together for no less than 45% of mankind, decided to participate in the market game, equilibrium wages for ordinary labor in the industrialized world, including Germany, have fallen.
Berlin is considering introducing minimum wages to fix this problem. This is at least what the Social Democratic Party and its labor minister, Franz Müntefering, demand. Chancellor Angela Merkel's Christian Democratic Party, the coalition leader, is still reluctant to endorse this proposal. But its opposition is eroding in view of the public support minimum wages enjoy.
Left-wing politicians and journalists dominate the debate. Minimum wages, they say, are necessary to maintain the living standards of the poor. They argue that minimum wages pose no problem for the economy: After all, most other European countries have them already.
They fail to acknowledge, however, the negative experience these countries had with minimum wages. The vast majority of empirical studies show they tend to cost jobs. In France, for example, a 1% increase in the real minimum wage reduces the employment probability of a young man by 2.5%. If the minimum wage is sufficiently low, as is the case in the U.K. and the U.S., where only about 1% of the work force earn it, it poses no major problem for the labor market. However, if it is as high as in France, where 15% of the work force earn minimum wages, it contributes to chronic unemployment…...

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