The German minimum wage: the solution for the European race to the bottom?

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The German minimum wage:

The solution for the European race to the bottom?

MA Thesis in European Studies

Graduate School for Humanities

Universiteit van Amsterdam

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Introduction

Germany was considered ‘the sick man of Europe’ around the turn of the century. This is hard to imagine if you see Germany as it is today; a lot of people admire Germany and their reforms Agenda 2010. However, there is another side to the coin and the reforms seemed to worsen the situation in the country; many still consider Germany as the sick man of Europe. It might have happened that Germany became part of the race to the bottom? Critics of globalization argue that the world economy is trapped in a race to the bottom, a race to level down labor standards in order to attract foreign direct investments. The national minimum wage – introduced on January 1, 2015 – is considered by many to be the remedy of the sick man of Europe. Therefore, this thesis will investigate what the consequences of a legal minimum wage for Germany and the rest of the European Union are and whether it is an effective measure to stop the race to the bottom in Europe? The research area will only include the European Union since Germany’s situation affects the rest of the EU. Many academics even regard Germany as the causer of the euro crisis. The first chapter will show why the German minimum wages is suggested as the solution for the race to the bottom in Europe.

Chapter one will discuss the Agenda 2010 reforms: the situation before the reforms, what the reforms include, and especially the outcome of Agenda 2010. It will explain the situation in Germany before the introduction of the minimum wage. The most important measures are part of the so called Hartz reforms which changed the unemployment benefits, jobs centers and includes a wide range of other employment measures. The most striking one is the extension of the ‘Minijob’. This chapter will show that the situation in Germany is not as positive as many people outside of Germany think: the labor standards leveled down and the poverty rate increased, as well as the in-work-poverty rate.1 Chapter two will theoretically illustrate this situation on the basis of the race to the bottom theory. The race to the bottom is a term which includes governmental measures to attract or retain economic activity in their country. This race is an outcome of globalization and/or free trade, and mostly occurs when the competition increases in a specific geographical area. In this thesis the geographical area is the euro zone. Chapter two will explain the theory on race to the bottom and whether it exists in Europe or not.

1

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Since the government is an important player in the race to the bottom theory, its role will be discussed too. Chapter three will discuss the SPD’s and CDU/CSU’s standpoints regarding export position, labor standards, minijobs and minimum wages. The SPD has advocated many years for the introduction of a legal minimum wage. This party recognizes the deteriorated social situation in Germany. However, it was the CDU/CSU that did not want a national minimum wage and did not see the gravity of Germany’s situation. However, on January 1, 2015 Germany introduced a minimum wage. It was one of the conditions of the SPD to form a coalition with the CDU/CSU. Chapter four will take a closer look at the consequences of this minimum wage for Germany and for the rest of the EU. The minimum wage has just celebrated its first birthday; therefore, this chapter will mainly be theoretical. Nevertheless, there is one year of data available and will be used but these short term statistics cannot confirm or disprove the theoretical predictions. The fifth chapter will bring everything together and will analyze whether a German minimum wage is able to stop the race to the bottom. To investigate this, it is needed to investigate whether the consequences of a minimum wage are the direct solutions of the causes of the race to the bottom in Germany.

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Chapter 1 Germany and Agenda 2010

The sick man of Europe

If you take a look at Germany in its current situation, it is hard to imagine that Germany was considered the sick man of Europe in the nineteen-nineties. Only twenty years ago Germany was facing high budget deficits and high unemployment rates. A good term to describe the situation in Germany was ‘Wohlfahrt ohne Arbeit’ (welfare without work).2 The GDP grew almost every year but the unemployment rate increased with it. Furthermore, the budget deficit was above the 3%; the norm of the Stability and Growth Pact of the European Union. The public debt raised and soon reached the norm of 60% which is also adopted in the Stability and Growth Pact as the maximum tolerable governmental debt.3 The Wohlfahrt ohne Arbeit also found its expression in the lack of the relation between the budget balance and economic cycle. Normally, during recessions the budget deficit increases and during economic boom the government has surpluses.4 This rule did not apply to Germany during the nineties: Germany was in an economic boom but the budget balance was negative.5 The underlying causes are the expensive retirement system in combination with the ageing population. On top of that, the expenditures on public health care system were high. Thirdly, the high unemployment in combination with the high unemployment benefits and to conclude, the German reunification.

The high unemployment and the unemployment benefit system is the most relevant cause. The system for the public unemployment benefits can be divided into two parts: the ‘Arbeitslosengeld’ and the ‘Arbeitslosenhilfe’. Someone who just lost his job, has the right to receive Arbeitslosengeld. You receive this benefit for the maximum length of 32 months, depending on your age and the amount of months of insurance. The benefit amounted 67% of your last earned net wage.6 After the Arbeitslosengeld you get the right to Arbeitslosenhilfe for a maximum duration of twelve months. These benefits amounted maximum 53% of the

2_{Anke Hassel, Christof Schiller, Der Fall Hartz IV. Wie es zur Agenda 2010 kam und wie es weitergeht,}

Frankfurt: Campus Verlag GmbH 2010

3_Eurostat,_{http://epp.eurostat.ec.europa.eu/}_{, accessed on 9 March 2016} 4

Paul Krugman, Robin Wells, Kathryn Graddy, Economics, European edition, New York: Worth Publishers 2008, page 735

5_Eurostat,_{http://epp.eurostat.ec.europa.eu/}_{, accessed on 9 March 2016}

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latest earned net wage but it depends on the income of your partner, savings etc.7 The goal of this benefit was the guarantee of a contained living standard, so that the transition to ‘Sozialhilfe’ would be easier. Sozialhilfe was the lowest benefit in Germany and amounted between 250 and 300 euro per month dependable on the region.8

Normally there is a negative relation between GDP growth and unemployment. However, in Germany there was a rare positive relation: the GDP grew and the unemployment rate too. In the nineties the average GDP growth was 2%. During the same period de unemployment increased from 5.5% in 1991 to almost 10% in 1997.9

The combination of the increasing unemployment rate and high benefits meant that the contributions rose from 4.3% to 6.5% of gross wage.10 Another effect of the high benefits – and the long period of payment – is the low incentive to find a new job.11

Also from the employers’ point of view it was not attractive to hire people. The labor costs – consisting mostly of social contributions – were very high which made labor expensive. Furthermore, German law included a lot of rules applying to labor. For instance, the dismissal protection; another barrier to hire labor force. On top of that, the term flexcontract did not exist in Germany. It was impossible to hire an employee on a flexible base because Germany wanted to protect their citizens against the (un)certainty to lose their job.12 Another point is the active labor market policy which can better be described as rigid. Evaluations of late nineties show that the active labor market policy measures barely had effect. This was not a direct cause of the high unemployment rate but it did not help to reduce the unemployment either.13

The German reunification of former East and West Germany. East Germany will also be mentioned shortly. The other two causes are not relevant to discuss them and also speak for themselves. The reunification was especially difficult for East Germany because it had to adapt to the West; from a communistic state to a capitalistic way of governance. First of all,

Frankfurt: Campus Verlag GmbH 2010, page 32

8_{‘author unknown‘, Hintergrund: Arbeitslosengeld, Arbeitslosenhilfe, Sozialhilfe – wer bekommt wie viel, wer}

bezahlt was?, Der Spiegel, 4 May 2001, http://www.spiegel.de/politik/deutschland/hintergrund-arbeitslosengeld-arbeitslosenhilfe-sozialhilfe-wer-bekommt-wie-viel-wer-bezahlt-was-a-132126.html, accessed on 12 March 2016

9

Paul Krugman, Robin Wells, Kathryn Graddy, Economics, European edition, New York: Worth Publishers 2008; Eurostat, http://epp.eurostat.ec.europa.eu/, accessed on 13 March 2016

10_{Deutsche Rentenversicherung Bund, Rentenversicherung in Zeitreihen 2015,}

http://www.deutsche-rentenversicherung.de/cae/servlet/contentblob/238700/publicationFile/62588/03_rv_in_zeitreihen.pdf, page 264

Frankfurt: Campus Verlag GmbH 2010

12_{The Economist, The sick man of the euro, The Economist, 3 June 1999,} http://www.economist.com/node/209559, accessed on 14 March 2016

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the planned economy was replaced by a market economy which resulted in the collapse of the industry and agriculture; Unemployment rose. The East also had to make the switch from producing capital goods to consumer goods, and the services sector became more important than the industry and agriculture. Despite of this enormous economic change, the economy in the East grew.14 Furthermore there was this mental switch of the East-Germans. In the new capitalistic economy, it is all about money, productivity and profit. In the DDR they made simple products with the well-known techniques, while the West-Germans were focused on developing new products and new technologies. This difference is visible in the labor productivity of the two: in 1990 the productivity in the East was one third of the productivity in the West, in 1994 this was 46% and in 2001 it was 60%. There still is a gap and the West also has a higher productivity growth than the East.15

The sick man of Europe is responsible for the significant growth of the ‘Lohnnebenkosten’ (labor costs). The labor costs mostly consist of social payments – retirement, health care and unemployment benefits – which increased in the nineties because of the reunification, the ageing population and the high unemployment rate. In 1991 people had to transfer 35,36% of their gross wage to the government, in 2003 this was 42,01%. In twelve years the labor costs increased with 25,5%. Since the net wages rose in the same period with 29,4%, that rise had to be paid by the employers. The employers were penalized because the strong labor unions were able to raise the gross wages so that the employees did not had to bear the high social benefits.16

Most important reforms of Agenda 2010

During the nineties the awareness grew that reforms were needed. Germany had landed in the vicious circle of growing unemployment, growing governmental expenditures, growing budget deficits, growing labor costs, and then again growing unemployment. The elections of 1998 were focused on the solution of this vicious circle. The SPD (sozialdemokratische Partei Deutschlands) won and Gerhard Schröder became chancellor. The SPD formed together with Die Grünen the government and followed up the CDU (christlich demokratische Union) who governed Germany for sixteen years with the CSU (christlich-soziale Union) and the FDP (freie demokratische Partei). However, the new government was not able to reform. The

14

Barry Eichengreen, The European Economy Since 1945, Princeton: Princeton University Press 2008, pages 306

15_{Ibid., pages 295-322}

16_{Heinz-J. Bontrup, Zu hohe Löhne und Lohnnebenkosten – Eine ökonomische Mär, June 2004,} http://www.boeckler.de/wsimit_2004_06_bontrup.pdf, accessed on 12 March 2016

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government and Schröder were reelected in September 2002. Thereafter, they were finally able to introduce reforms within six months; in March 2003 Schröder presented his reform pack ‘Agenda 2010’. The main goal can be summarized in one sentence: “Die Agenda 2010 schafft die Voraussetzung dafür, dass Deutschland im Jahr 2010 soziale Sicherheit bietet, die Wirtschaft wächst und die Staatsfinazen konsolidiert sind.”17

The most important reforms of Agenda 2010 are the Hartz-reforms. Since these reforms are the most relevant for this thesis, they will be discussed most detailed. The other reforms will be mentioned shortly. For the health care system and the retirement benefits multiple commissions were needed. For both systems, the reforms needed to make them cheaper and sustainable. Eventually the reforms turned them into basic insurances whereby additional private insurances are possible.

The Hartz-reforms are the essential reforms of Agenda 2010. On February 22, 2002 Gerhard Schröder formed a commission led by Peter Hartz in order to think out an effective policy. Hartz was the human resources executive at Volkswagen AG, member of the SPD and member of the labor union IG Metall. In August 2002 he presented the reforms. First, Germany reformed the system in general; it consists now of two parts, the ‘Arbeitslosengeld I’ and ‘Arbeitslosengeld II’. The unemployed receive the first one when they just become unemployed. It looks like the old Arbeitslosengeld but the difference is the duration of payment. As of today, people have the right to this benefit for 12 months instead of 36 months. This shortening should encourage unemployed to find more actively a new job, the costs of the system will reduce, and the labor costs will lower. Furthermore, the unemployed will get 60% of their last earned net wage instead of 67%. After the twelve months unemployed have the right to Arbeitslosengeld II which is a combination of Arbeitslosenhilfe and Sozialhilfe. This benefit will be very basic and does only cover the basic needs of life.18

The core principle of the Hartz plans is ‘Fordern und Fördern’ (demand and support). About Fördern, Germany will reform the labor offices so they will actively help the unemployed to find the perfect job. This will enhance better matching between jobseekers and the open vacancies. At the same time, the unemployed are demanded to be active in their search for a new job. This includes mandatory registrations at those labor offices. On top of that, the unemployed are forced to accept a job below their skills and education level otherwise they will lose their unemployment benefit. There is also a possibility that

Frankfurt: Campus Verlag GmbH 2010, pages 191-217

18_{Simon Hegelich, David Knollmann, Johanna Kuhlmann, Agenda 2010: Strategien, Entscheidungen,}

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unemployed are obliged to accept a so called ‘1-euro-job’. This job is specially created for the long term unemployed to gain experience and in return they get 1 euro extra unemployment benefit.19

Other reforms have more to do with employment rather than unemployment. First of all, the ‘Meisterbrief’ will be abolished for many crafts. A ‘Meisterbrief’ is a master’s certificate which will be handed out after passing the master’s examination. This certificate is necessary to exercise handicraft professions. For the crafts that could harm the public health this Meisterbrief is still necessary after the reforms. This will make it easier to start your own business in certain branches.20 Secondly, unemployed Germans who want to establish an ‘Ich-AG’ (businesses founded by unemployed) can count on governmental support.21

Furthermore, the protection against dismissal for newly hired employees will be eased for small businesses with a maximum of ten employers.22

The Minijobs were reformed. Minijobs are temporary workplaces and already exist since 1977. The reforms of 2003 allowed people to work for a salary up to 400 euro per month, and neither the employee nor the employer have to pay taxes or other social contributions. The limit on working hours was taken away. The idea behind the minijobs is that it functions as a bridge between unemployment and employment: unemployed people get working experience and will get a permanent job after the minijob.23

All reforms will theoretically decrease the labor costs. The social contributions – for the retirement, health care and unemployment system – will sink towards a relatively normal level and thus the labor costs will decrease. Labor will be cheaper which is good for the German economy and is also necessary since Germany experienced two years of negative growth. A growing economy generates more jobs which means more tax incomes and less employment benefits that have to be paid. The German government will save expenditures because of Agenda 2010 and her income will grow. The structural budget deficit can be

19

Volker Lankes, Die Agenda 2010 – Reform des Sozialstaats. Überblick zu ihren Zielen und Maßnahmen sowie Kritik und Alternativen, Norderstedt: Books on Demand GmbH 2005, pages 6-7; Simon Hegelich, David Knollmann, Johanna Kuhlmann, Agenda 2010: Strategien, Entscheidungen, Konsequenzen, Meppel: Ten Brink 2011, pages 39-50

20_{Volker Lankes, Die Agenda 2010 – Reform des Sozialstaats. Überblick zu ihren Zielen und Maßnahmen}

sowie Kritik und Alternativen, Norderstedt: Books on Demand GmbH 2005, page 6

21_Ibid. 22_Ibid.

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eliminated and the way to stable and healthy state finances is free. Especially for the Stability and Growth Pact this is necessary.24

Positive achievements

The goals regarding the pension system were achieved. Regarding the health care system, some goals were reached, some not and unforeseen negative side effects occurred.25 Considering the labor policy, Germany partly reached their aims. Before the reforms Germany experienced a positive relation between GDP growth and unemployment. Today, the negative relation is back like it should be: the unemployment decreases and the GDP grows.26 Germany wanted to halve the number of unemployed before 2008.27 However, it took until 2012 before the objective was reached. Despite of the crisis the unemployment rate decreases every year except for 2009.28

The new system with Arbeitslosengeld I and II is clearer and cheaper than before.29 The total costs of the unemployment as percentage of the GDP decreased from almost 4% to approximately 2%. The expenses for the active labor market policy increased; this was foreseen because the German state does more on this field than before.30 Furthermore, the Fördern und Fordern principle did not work. The percentage of registered unemployed Germans increased with 9% in seven years; not what Germany expected because registration at the BA (Bundesagentur für Arbeit) was made mandatory. However, besides the group of registered unemployed there is also the so called ‘hidden reserve’. This group consists of three kinds of unemployed and one of them is the Germans who attend labor market policy measures like trainings organized by the BA’s. So it might be possible that there were more people using the BA than the registered 50% in 2012.

The Ich-AG’s were a success: after the start in January 2003, the number of companies increased from 1,700 to 24,500 within five months. The goal was reached by far. The most successful reform is the minijob. Hartz I consisted of the law that made flexwork possible,

sowie Kritik und Alternativen, Norderstedt: Books on Demand GmbH 2005, pages 4-5

25

Simon Hegelich, David Knollmann, Johanna Kuhlmann, Agenda 2010: Strategien, Entscheidungen,

Konsequenzen, Meppel: Ten Brink 2011, p. 216

Frankfurt: Campus Verlag GmbH 2010, p. 227

28

Eurostat, http://epp.eurostat.ec.europa.eu/, accessed on 18 March 2016

29_{Ulrich Blum, Agenda 2010 – eine Zwischenbilanz, 2008}

30_Eurostat,_{http://epp.eurostat.ec.europa.eu/}_{, accessed on 18 March 2016; Hurley, J., ‘Financiering en uitvoering}

van actief arbeidsmarktbeleid tijdens de crisis’, Eurofound, 25 October 2010,

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including the minijobs. Hartz II was a radical expansion of the minijobs. Between 2003 and 2011 two more million people worked minijob.

The labor costs were high. Between 1982 and 1998 they grew from 34% to 42%.31 The reforms made it possible to decrease it to 39,5% in 2013. Overall, the labor costs grew between 2000 and 2010 with only 1,7%.32 Thanks to this wage moderation Germany got a good competitive position. On top of that, Germany delivers high quality products, like cars, agricultural and industrial machines. People used to buy those products for their quality, nowadays people also buy them because of Germany’s image; Germany is admired by many.

However, the reforms did not lead to healthy state finances. Since 2003 the budget balance was only in 2007 and 2012 positive. The other years Germany had a budget deficit, of which five times above the 3% norm of the SGP. The public debt also does not comply to the EU rules: In 2010 the debt was above 80% of GDP. However, the reforms did have effect immediately after the implementation: the budget deficit declined, in 2007 it was positive and the public debt decreased every year. The outbreak of the global crisis in 2008 breached through these positive developments. The budget deficit shot up to 3% and 4% in respectively 2009 and 2010. The public debt rose in the same years to approximately 70% and 80%. Germany recovered very quickly and after 2010 the budget deficit declined and the public debt stabilized. The extra expenses Germany had to do were the savings of a few national banks.33

Other side to the coin

With every change comes criticism. The new retirement system should only be advantageous for the good earning Germans and Germans with children.34 Gregor Gysi calculated that it is for everyone difficult to build up a good pension; in most cases you need at least 40 years of employment for a basic pension benefit. This critic turned out to be correct. That is the reason why Gysi advocates minimum wages of 10 euro per hour.35

31_{Joachim Möller, Ulrich Walwei, Die Agenda 2010 war ein unerwarteter Erfolg, Die Zeit, 14 March 2013,}

http://www.zeit.de/wirtschaft/2013-03/agenda2010-reformen-erfolg, accessed in 19 march 2016

32_OECD,_{http://stats.oecd.org/}_{, accessed on 19 March 2016}

sowie Kritik und Alternativen, Norderstedt: Books on Demand GmbH 2005; Daniel Baumann, Der Riester-Flop,

Die Berliner Zeitung, 15 July 2013, http://www.berliner-zeitung.de/wirtschaft/private-altersvorsorge-der-riester-flop,10808230,23723590.html, accessed on 19 March 2016; Nadine Oberhuber, Altersvorsorge. Das leere Versprechen, Die Zeit, 16-09-2013, http://www.zeit.de/2013/37/altersvorsorge-riesterrente, accessed on 19 March 2016

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The Hartz-reforms are the reason why so many Europeans admire Germany; the unemployment decreased and the GDP grew. It is a perfect scenario but the paragraph title ‘other side to the coin’ especially applies to the labor market reforms. The Hartz-plans got a lot of criticism. First of all, critics wonder if the Ich-AG’s are as effective as thought out before. The annual income should not be higher than a certain amount and therefore it is in some cases more beneficial to stay unemployed and to live of state aid. Furthermore, the Ich-AG is not allowed to hire employees; that hinders grow potential. Besides, the unemployed were not demanded to hand in a business plan when they applied for an Ich-AG. People doubt whether those companies are profitable or that the governmental state aid for the Ich-AG’s are a waste of money.36

Minijobbers do not accrue any pensions or other social insurances because they do not have to pay social contributions. The idea behind the minijobs was that it should function as a bridge between unemployment and employment, however it turns out that the minijobbers fluctuate between unemployment and a minijob. Holger Bonin argues that the minijobs are a step into the wrong direction. The minijobs advance insecure jobs instead of guaranteeing work. The number that actually get a job after the minijob is very low. According to Bonin, this will not change in the near future because minijobs are too attractive for both employers and employees. Employees mostly see the minijob as an extra job with a nice extra income. Women for example want to add something to their husband’s income. However, minijobbers forget that these kind of jobs do not enhance your skills and qualities, and on top of that you get a certain negative image. For the employers, the minijobs are even more attractive. There are indications that employees replace fulltime jobs for minijobs. Those minijobs are cheaper and there is no limit on working hours. It happens that people have to work so many hours that – in the end – they earn less than 5 euro per hour. Almost 90% have this hourly wage. So the 7.5 million minijobbers in Germany do not accrue any social security, are unemployed after the minijob and are being exploited by the employer.37 The term ‘social jumping’

36

Sigrid de Vries, Ich-AG: een nieuw begin of bezigheidstherapie, 1 July 2003,

https://duitslandinstituut.nl/artikel/4046/ich-ag-een-nieuw-begin-of-bezigheidstherapie, accessed on 19 March 2016

37_{Holga Bonin, Minijobs: Schritt in die falschn Richtung, 2012,}

http://www.econstor.eu/bitstream/10419/68357/1/733724507.pdf, accessed on 19 March 2016; ‘author unknown‘, Beschäftigte arbeiten häufiger nebenbei im Minijob, Frankfurter Allgemeine Zeitung, 10 January 2013, http://www.faz.net/aktuell/wirtschaft/konjunktur/arbeitsmarkt-in-deutschland-beschaeftigte-arbeiten-haeufiger-nebenbei-im-minijob-12020340.html, accessed on 19 March 2016; Hans Böckler Stiftung, Schlecht bezahlte Minijobs: Sackgasse für Millionen, January 2012, http://boeckler.de/impuls_2012_01_4-5.pdf, accessed on 19 March 2016

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describes this phenomenon really well. Not only the German employers are responsible, also the German government maintains this regime.38

A lot of minijobbers and other Germans who were forced to accept a job below their skills are in financial problems. Even though they have a job, 1.3 million people need financial support from the government. Of them 300,000 have a full time job. Another noteworthy fact is that Germany has the second largest low wage sector in Europe. Lithuania is number one. One in six Germans live in poverty, one in three children in Berlin live in families that need social support and in Neukölln there are whole streets which are dependent on state aid.39 As long as there is no minimum wage in Germany this will not change. The low wage sector was created by the minijobs but it increases the poverty rates and also the in-work-poverty rates.40 Though, the low wage sector is good for Germany’s export position. Especially in combination with their high technical products. Dullien argues however, that the labor market reforms were not necessary; the export, the good geographic position of the country and the labor unions who are willing to make good deals with the employers, are factors that could create economic success by themselves. Agenda 2010 only made a little contribution to it.41

In 2014 9.9% of the Germans lived in in-work poverty. In 2005 – in the middle of the period of the introduction of the many reforms – this was only 4.8%. You might assume that this increase was caused by the euro crisis but shortly after 2005 and before the outbreak of the crisis in 2008, the in-poverty rate was already risen to 7.4% in 2007. In the period 2005-2014 the rates for the Netherlands, the UK and Belgium were stable despite of the euro crisis. Even in Greece it did not increase. Furthermore, the percentage of people at risk of poverty or social exclusion grew in Germany in the same period with 2%. Again, in the Netherlands, the UK and Belgium this rate did not change.42 It might be evident that Germany cannot blame the euro crisis for these increases. It is more logical that Agenda 2010 are mainly responsible for these negative developments.

It is clear that the economic success in Germany has a dark side. A study of UNICEF on child poverty in European industrial countries confirms this. The research includes a list with number 1 as good performing country and number 29 as worst performing. The child

38_{Paul Krugman, Robin Wells, Kathryn Graddy, Economics, European edition, New York: Worth Publishers}

2008

39_{Max van Weezel, Sophie Derkzen, Het Duitse Jobwunder, Vrij Nederland, 15 September 2013} 40

Eurostat, http://epp.eurostat.ec.europa.eu/, accessed on 19 March 2016

41_{Max van Weezel, Sophie Derkzen, Het Duitse Jobwunder, Vrij Nederland, 15 September 2013,}

http://www.vn.nl/Archief/Buitenland/Artikel-Buitenland/Het-Duitse-Jobwunder.htm, accessed on 19 March 2016

42

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poverty rate was measured by fourteen indicators like three meals a day, a quiet place to do homework, internet and frequent leisure activities. Germany is on the 15th place; 8.8% of the German children answered the negative way on the statements. Even Spain – despite their ongoing recession – is doing better with place 11 on the list. Even though Germany’s economy is great at the moment, on the long run they have to pay the price for the current child poverty: lower skills, lower productivity, worse health condition, and a lower general level of education.43

43_{Unicef Innocenti Research Centre, Measuring child poverty. New league tables of child poverty in the world’s}

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Chapter 2 The race to the bottom in the European Union

The term ‘race to the bottom’ explained

A definition of the term ‘race to the bottom’ given by the Financial Times is ‘the situation in which companies and countries try to compete with each other by cutting wages and living standards for workers, and the production of goods is moved to the place where the wages are the lowest and the workers have the fewest rights.’44

A race to the bottom is not limited to labor standards; lowering taxes is also a good instrument to attract more foreign investments.45 Globalization skeptics argue that the race to the bottom is a direct effect of globalization. They often warn for the consequences of international competition for investments on labor standards. Countries cut back on regulations and enforcement in order to lower labor costs and to increase foreign direct investments.46

Here, it is about the race to the bottom with the use of social dumping. Social dumping might happen in two forms. First of all, labor from other countries that is cheaper are employed or secondly, the production is moved to the low wage country. Regarding the differences in wages in the European Union, social dumping was one of the fears when Frits Bolkestein introduced his Directive 2006/123/EC on services in the internal market.

There is a distinction between labor standards and core labor standards. The ‘core labor standards’ are universal and the other category ‘labor standards’ differs per country because they are dependent on the economic and political situation of the country. Examples of labor standards are minimum wages and safety conditions at the workplace. Core labor standards include the right to collective bargaining, the abolition of child labor and the elimination of discrimination at the workplace. In total there are eight core labor standards, set up by the International Labor Organization (ILO). Since more than 130 countries have ratified multiple agreements on international labor standards, those core labor standards are universal and receive prevailing acceptance, but the other labor standards are controversial and are therefore called ‘acceptable conditions at work’.47

44_{Financial Times Lexikon,}_{http://lexicon.ft.com/Term?term=race-to-the-bottom}_{, accessed on 29 March 2016} 45_{Davies, R. B., & Vadlamannati, K. C., 'A race to the bottom in labour standards? An empirical}

investigation'. Journal of Development Economics, 2013, Vol. 103, pages 1-14

46_{The Economist, Labour standards: Racing to the bottom, 13 November 2013,}

http://www.economist.com/blogs/freeexchange/2013/11/labour-standards, accessed on 29 March 2016

47_{Martin Busse (2002), ‘Do labor standards affect comparative advantage in developing countries?’ World}

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To understand the definition of the term ‘race to the bottom’, we must start with the theoretical background of how a race to the bottom begins. There are three principles which explain the term: first of all, the link between labor standards, comparative advantage and trade, secondly the effect of countries with low labor standards on countries with high standards, and at last the interdependency of the countries in the world.

Theoretical background

When we focus on the relation between comparative advantage and labor standards, the first phenomenon we must elaborate on is the comparative advantage. David Ricardo developed the theory on comparative advantage in 1817 to explain trade between countries, cities etc. Ricardo explains his theory on the basis of two countries and two products. When country A in comparison with country B is better or more efficient in producing product X than in product Y and country B is better in the production of product Y, the both countries could focus on the production they can do best and trade with each other. Country A has a comparative advantage in producing product X. However, it might be possible that a country has an absolute disadvantage compared to another country but in the end it has a comparative advantage. For example, the clothing industry in Bangladesh. Even though, the Netherlands has an absolute advantage in producing clothes, it still imports it from Bangladesh. This is the comparative advantage: comparatively it is better that the Dutch focus on the production of high tech goods because they have the right human capital which Bangladesh lacks. The Bengali people are only able to produce low-tech, low-value-added products like clothes. What you see here is that there are gains from trade even though there is one party that has absolute advantage in both activities.48

Sources of comparative advantage could be international differences in technology, factor endowments and climate.49 Climate is something fixed just like the production factor land. The other sources of comparative advantage like technology and the productions factors capital, human capital and labor are dynamic. With good education it is possible to improve human capital in the long run. According to the critics of globalization, leveling down your labor standards is also one of the possibilities to get a comparative advantage. It makes labor and thus production cheaper.

Recommendations’, http://www.ilo.org/global/standards/introduction-to-international-labour-standards/conventions-and-recommendations/lang--en/index.htm, accessed on 29 March 2016

2008, pages 26-33

49

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The Heckser-Ohlin model builds further on Ricardo’s comparative advantage theory. The economists Heckser and Ohlin explain the theory on the basis of factor endowments and visualize the relationship between factor availability and comparative advantage.50 The model is built around the key term ‘factor intensity’: ‘the factor intensity of production of a good is a measure of which factor is used in relatively greater quantities than other factors in production.’51 For example, oil refining is capital-intensive because it relatively uses a high ration of capital, and clothing manufactures are labor-intensive because it tends to use more labor than capital. A country which has an abundance of labor has a comparative advantage in labor-intensive industries. Another reason for a country to choose for a certain industry is the opportunity cost of it. Opportunity cost is the real cost of an item, including what must be given up to obtain it. A country with an abundance of labor has a low opportunity cost of labor-intensive production. The same for a country with an abundance of capital; the opportunity cost of producing goods that are capital-intensive is low.52

Mathias Busse says that the international discussion of the relation between international trade and labor standards can be divided into two central questions: first, ‘whether countries can improve their competitiveness, and therefore increase production and exports of labor-intensive goods with lower labor standards’, and secondly ‘whether there might be, partly as a result of the first issue, “social dumping” and a “race to the bottom” on such standards’. Busse focuses on the second question but he also answers the first question in the affirmative way. He states that leveling down the labor standards can improve the factor endowment. For example, if you lower the minimum age for child labor you will increase the unskilled labor endowment. The amount of available labor is augmented but on the long run it is disadvantageous because you will not generate (high)-skilled labor.53

Busse found out that there is a relationship between comparative advantage and the level of core standards for the countries that are included in this investigation. However, this relationship is partly invalidated with his argument that it seems that the level of labor standards is decided nationally. The exogenous influence on labor standards is not determined; further research is needed to determine whether interstate trade affects the labor standards of one’s country. For now, Busse argues that a race to the bottom takes place within the borders of one country; labor standards policy is purely individual and there are no

2008, pages 30-33

51_{Ibid., page 219} 52_{Ibid., pages 218-221}

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external influences on it.54 Even though this investigation mainly focused on unskilled labor intensive goods. Nevertheless, this article clearly illustrates the relationship between the level of labor standards and comparative advantage.

Before discussing the second principle, the third principle will be elaborated. The third was about the interdependency of countries. This means international trade and globalization. Globalization is an ongoing process of global integration, the world becomes one and all countries are interrelated.55

The second principle about the effect of low labor standards in specific countries on other countries with high labor standards must be discussed with globalization in the back of your minds. Many academics divide the world into the ‘rich countries’ with high labor standards and the ‘poor countries’ with low labor standards. On top of that there is the division of the North and the South. The North includes Europe, the northern Asian countries and North-America; all characterized as developed, rich countries with high labor stands. On the contrary the South that includes the developing, poor countries with low labor standards. There is an ongoing stalemate about labor standards between the developed North and the developing South. Singh and Zammit see the race to the bottom theory as “a cross-border externality of low labour standards in poor countries for labour in the richer countries.”56

Contrary to Busse, they affirm that countries do influence each other. Globalization intensifies the global interdependencies and relations, which causes an increase in cross-border externalities of labor standards. It can lead to two forms of a race to the bottom, first of all it can cause labor market difficulties in the rich countries because the work is taken over by poor countries with lower labor standards. Production of labor intensive goods is cheaper in those countries than in rich countries with high labor standards. Secondly, it can lead to an erosion of labor standards everywhere. In order to compete with the poor countries, rich countries level down their labor standards not only because they want to keep up with the competition of the poor countries but also because they want to stay compatible with other rich countries. It might be possible that a country that is not competing with poor developing countries decreases their level of labor standards because they want to (re)gain a competitive advantage in relation with another rich country which on its turn had leveled down its labor

Development, Vol. 30, No. 11, pages 1921 - 1932

55_{Ibid., pages 1922-3}

56_{Singh, A., Zammit, A., ‘Labour standards and the ‘race to the bottom’: rethinking globalization and workers’}

rights from developmental and solidaristic perspectives’, Oxford review of economic policy, 2004, Vol. 20, No. 1, page 91

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standards to stay compatible with poor countries. So the trend of keeping up with the low labor standards of poor countries expands to a global competition of labor standards.57

Evidence for the possible existence of a race to the bottom

Singh and Zammit argue that it is difficult to ascribe the race to the bottom in the two forms to the North-South opposition. The two forms are: it can cause labor market difficulties in the rich countries and it can lead to an erosion in labor standards everywhere. About the first, weak form: There are labor market difficulties, but it cannot be affirmed that it is caused by globalization and by the low labor standards in the South. In the developed countries there are important deficits visible: mass unemployment, increased income inequality and de-industrialization. In Europe the main deficit was mass unemployment – often ascribed to the inflexibility of the European labor market – instead of increased income inequality. In the same period the exports in manufacturing fell from 83% in 1980-2 to 71% in 1996, as percentage of the total world manufacturing exports. Meanwhile, the export share of the developing South increased from 12 to 25%. The combination of labor market deficits in the North and the increase in trade with the South seems to be a coincidence of time. Singh and Zammit give for each deficit in the North an empirical counterargument. The de-industrialization is mostly caused by national economic and technologic developments instead of trade with the South. The empirical evidence also shows that the increased income inequality has nothing to do with the North-South manufacturing trade. About the last deficit, the evidence is not strong. There seems to be other more important causes of Europe’s mass unemployment. The manufacturing trade between Europe and the South is not significant. Thus, there is not enough evidence to confirm the first form – that it can cause labor market difficulties in the rich countries – of the race to the bottom. The timing of the labor market difficulties in the North and the race to the bottom are coincidence.58

The second form of the race to the bottom is the strong form that the North-South trade can cause an erosion in labor standards everywhere. The first argument which disproves it, is the improvements in real wages and labor standards in East Asian countries. These successful countries are named as NICs, newly industrialized countries. Surprisingly, those countries are the largest exporters of labor-intensive manufactures to the US economy.

57_{Ajit Singh, Ann Zammit, ‘Labour standards and the ‘race to the bottom’: rethinking globalization and}

workers’ rights from developmental and solidaristic perspectives’, Oxford review of economic policy, Vol. 20, No. 1, pages 85-90

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Secondly, the labor standards in the South American countries in the 1980s and 1990s fell but, in the same period, 90% of the new jobs were created in the informal sector. The authors argue that the erosion of labor standards have more likely to do with the informalization rather than with the international competition. At the same time Latin America experienced low economic growth rates and since economic growth is responsible for the creation of good jobs, good wages and good labor standards, it is even more affirmed that the fall in labor standards in South America has nothing to do with the race to the bottom theory. In the same period the labor standards in the USA and the European Community fell too. In these countries the rights to collective bargaining, to strike, to unionize etc. were reduced. The fall in labor standards seems to be a result of the de-unionization. However, the other way around, competitive erosion of labor standards could also get expression in de-unionization. If that is the case, then it seems that it is more about competition between developed nations instead of competition between developing and developed countries because unionization almost only exists in the developed North. Singh and Zammit conclude that – just like in the first form – there is a coincidence of timing. The race to the bottom cannot be ascribed to North-South opposition.59

However, there are many concerns about globalization that countries compete for FDI’s with increased flexibility of labor standards. Governments remove policies – which can be labor standards, environmental regulation and taxation – because they might be unattractive for foreign investors even though those policies are socially desirable or necessary. Ronald B. Davies and Krishna Chaitanya Vadlamannati investigated 148 countries over 18 years in order to estimate the interdependency of states. The results of this research was conducted with an econometric approach and show that there is ‘a robustly positive and significant spatial lag which is consistent with strategic complements in both practices and the combined labour rights index. Notably, this pattern is less evident in labour laws, suggesting that competition is less in the institution of standards, but in their enforcement.’ They also found out that it is especially concentrated in the states with relatively weak standards, and especially in the Middle East and Latin America.60

Note the difference the authors make between labor laws and labor practices. The laws are not a guarantee of how they are carried out. The term ‘unfair labor practice’ is included in

59

Ajit Singh, Ann Zammit, ‘Labour standards and the ‘race to the bottom’: rethinking globalization and workers’ rights from developmental and solidaristic perspectives’, Oxford review of economic policy, Vol. 20, No. 1, pages 92-3

60_{Davies, R. B., & Vadlamannati, K. C. (2013). 'A race to the bottom in labour standards? An empirical}

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British law and in American law. They both define the term as any action that interferes an employee’s rights.61

There is evidence for a race to the bottom in labor standards but especially in labor practices instead of labor laws. This is also what we see in the case of Germany with the minijobs. The initial plan of the minijob is good (labor law) however the reality turned out to be different (labor enforcement).

Florence Arestoff and Clotilde Granger investigated the effect of trade openness on the level of core labor standards based on econometrical research. They analyzed labor standards of 40 developing countries and 25 developed countries. They used two methods for their investigation. The first one underlines the assumption that the openness of trade affects the core labor standards. However, the authors assumed that the results were biased because some variables were high probably endogenous. Another method was used to take away this bias, taking into account that GNP, Trade and Schooling might be endogenous too. So the difference between the first and second method is that GNP, trade and schooling are considered as endogenous variables. This method confirms that GNP and schooling are significant determinants of the level of core labor standards. Trade has a positive impact but not a significant influence on labor standards. So the openness of trade has no impact on core labor standards. Arestoff and Granger conclude that the “level of these standards is first and foremost a national choice, depending on economic and social developments and also on cultural values.”62

This conclusion brings into question the possibility for a race to the bottom. According to them, it cannot exist.

So, there is discussion whether labor standards are a national matter and therefore not susceptible for an international race to the bottom, or labor standards are susceptible to exogenous influences in this context in the form of labor standards in other countries. Singh and Zammit argued that de-unionization is part of national policy but might be caused by international competition. According to Arestoff and Granger, the level of core labor standards is first and foremost a national matter: it depends on economic, cultural and social factors.63 However, Busse and the International Labour Organisation (ILO) argued that core labor standards are universal and given, and the “normal” labor standards are nationally determined. According to Elliot and Freeman, “the failure of any nations to adopt humane

61_{Practical Law: a legal solution from Thomson Reuter, ‘Unfair labor practice (ULP),}

http://uk.practicallaw.com/5-507-5808, accessed on 13-4-2016; US federal labor relations authority, Unfair labor practice, https://www.flra.gov/ulp;, accessed on 13-4-2016

62_{Davies, R. B., & Vadlamannati, K. C. (2013). 'A race to the bottom in labour standards? An empirical}

investigation'. Journal of Development Economics (103), page 14

63_{Florence Arestoff and Clotilde Granger (2004) Does Trade Openness Affect Core Labour Standards?}

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conditions of labor is an obstacle in the way of other nations which desire to improve conditions in their own countries.”64 It seems that the developed North takes it for granted that the developing South should implement the same labor standards, however some labor rights cannot be implemented instantly but are goals to be worked towards.65 Elliot and Freeman endorse the external influence of the level of labor standards in a certain country.

Leaving the discussion about the exogenous or endogenous core of the level of labor standards, what about the relation of developed countries mutually? The most articles concern the stalemate between the developed North and the developing South. Singh and Zammit argue that competitive erosion of labor standards could also get expression in de-unionization. If that is the case, then it seems that it is more about competition between developed nations because unionization almost only exists in the developed North.

The European situation on interdependency, competition and labor standards

We will take a closer look at a few EU member states. We can investigate every member state but a selected group of five countries can represent the others well. First of all, Germany. The Netherlands is another western European country, stable, democratic and economically good performing despite the global crisis. Spain represents the southern European member states which are in trouble after the outbreak of the global crisis. Lithuania was mentioned in chapter one as the country having the biggest low wages sector in Europe and we can see Lithuania as the representative of the East. Denmark represents the Scandinavian countries which are always considered as stable, healthy and good performing countries; good performing in every way. So the group of five representatives consists of Germany, the Netherlands, Spain, Lithuania and Denmark.

Is there a basis for competition between the five countries? First of all, they are united in the EU. With the introduction of the euro on January 1, 2002 the interconnection intensified. Lithuania recently introduced the euro on January 1, 2015.

64_{Ajit Singh, Ann Zammit, ‘Labour standards and the ‘race to the bottom’: rethinking globalization and}

workers’ rights from developmental and solidaristic perspectives’, Oxford review of economic policy, Vol. 20, No. 1, page 87

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- 23 - 2002 2013 Netherlands 80.5 75.7 Denmark 69.9 63.5 Spain 74.9 63 Lithuania 69.3 57.4 Germany 63.7 57

Figure 1: Export to other EU member states as percentage of total exports. Source: Eurostat

The statistics on trade confirm the interdependency of the EU member states, see figure 1. Germany is the least dependent on the other EU member states since only 57% of their export goes to those countries. However, the value of this 57% is 623.4 bn. euro. To compare, Lithuania exports 57.4% with the value of 14.1 bn. euro. The Netherlands is the most dependent on the

EU members (75.7% in 2013). The value of the Dutch export is the second highest, 382.8 bn. euro. For every EU member state, the EU is the biggest export market even though the share decreased between 2002 and 2013. However, this is for most member states only a decrease in percentage; the real numbers show that everyone’s export to other member states increased except for Ireland. These numbers confirm the interdependency of the European Union’s members.66 What about the competition between the countries? Do they offer the same products and compete with each other or do they produce subsidiary goods?

Except Greece and Portugal, all the EU member states export one or more of the following product groups: chemicals, machinery, machinery and instrument, machinery and equipment, textiles, foodstuffs, vehicles and pharmaceuticals.67 This suggests that there must be competition between the countries. Normally these products are considered as high-technology exports; Products with high research and development (R&D) intensity.68

The investments in R&D does say something about the quality of the products. These data provide us information on the development of a country, whether they renew themselves and whether the countries are competitors or not. Countries with high R&D expenditures invent new technologies and new products. A progressive country offers unique products. Countries that do not invest in R&D, do not develop themselves and keep producing the same products with the same techniques year after year. Of course it might be possible that they copy another country’s technologies and such, but forerunners are more attractive.

Germany is among the few who spend almost 3% of GDP on R&D. Denmark spends a bit more, 3.2% of their GDP. The Netherlands is at the average of the European countries:

66

Eurostat, http://epp.eurostat.ec.europa.eu/, accessed on 20 April 2016

67_{Central Intellegence Agency, The World Factbook,} https://www.cia.gov/library/publications/resources/the-world-factbook/, accessed on 27 April 2016

68_{World bank data, ‘high technology export (current US$)’ and ‘high technology exports (% of manufactured}

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around 2%. Spain spends approximately 1.25% and Lithuania 0.9% of their GDP.69 Germany, Denmark and the Netherlands are obviously the countries that renew and it confirms statements that Germany has developed itself into a strong and productive country in the production of high-value added, high-tech products. The southern and eastern EU member states do not invest and are locked into the production of low-value added, low-tech products.70 Regarding the German export products of such high quality – and especially in combination with the relatively low labor costs – Germany stands alone.

So far, no evidence for a race to the bottom. The circumstances in which these products are made, the labor standards, could tell us more. The index CLS stands for core labor standards and is rated on a scale from 0 to 1. With 0 as total absence of these rights and 1 as full respect for these labor rights. The criteria have led to the following levels for the group of representatives: Germany, the Netherlands and Denmark score 1 which means full respect to core labor standards. Spain rates 0.92 and Lithuania is not included on the list. Countries around Lithuania which are included on the list are Poland (0.92), Russia (0.75) Slovak Republic (0.92) and the Czech Republic (0.92). Since Lithuania is as close to the EU as Poland, Slovakia and the Czech Republic we might assume that Lithuania would have a similar classification. Bulgaria is lowest rated with only 0.75 followed by Hungary, Romania and Greece with each 0.83. The European Union is scoring really good since in the other three continents there are only two countries out of 41 – Canada and Australia – that scored 1. The United States has 0.83 and the lowest rates are to be found in Bangladesh and Pakistan with 0.71

These major differences between Europe and the rest of the world might suggest that – like Arestoff and Granger argue too – the level of core labor standards is a national matter. Why else would Australia be the only country with such high labor standards? All the countries around Australia have very low rates except for Japan. This eliminates the statement that poor countries with low labor standards negatively affect rich countries with high labor standards. However, we must focus on the EU only. If we zoom in on the EU member states and calculate the average: it is 0.934. Unfortunately, only 20 of the 28 EU member states are

69_{World bank data, ‘Research and development expenditures (% of GDP)’,}

http://data.worldbank.org/indicator/GB.XPD.RSDV.GD.ZS, accessed on 27 April 2016

70

Servaas Storm, ‘German wage moderation and the Eurozone crisis: a critical analysis’, Institute for new

economic thinking, 8 January 2016, https://ineteconomics.org/ideas-papers/blog/german-wage-moderation-and-the-eurozone-crisis-a-critical-analysis, accessed on 7 May 2016

71_{Florence Arestoff and Clotilde Granger, ‘Does Trade Openness Affect Core Labour Standards?’ European}

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on the list.72 If we include the eight residual countries and forecast their potential score the average would be 0.922. Forecasts were mainly based on their neighboring countries and a bit on their reputation. It can be stated that the EU respects labor standards.

Also the endogenous factor schooling is of importance according to Arestoff and Granger. Let us take into account the educational background of the labor force in the five representative countries. In Germany 87.3% is medium or high educated. For the Netherlands, Lithuania, Denmark and Spain this is respectively 79.4%, 93.2%, 82.2% and 61.3%. Noteworthy is the high level of education in Lithuania and in Spain 38.2% is high educated where in Germany only 27.6% is high educated. Also the statistics on population aged 20-24 having completed at least upper secondary education are worth mentioning. In Germany the number is 77.1%, in Denmark 72.5% and in the Netherlands 79%. In Spain 65.8% have completed at least upper secondary education and in Lithuania it is 91.4%.73 Remarkable statistics, since we would expect that the western and northern European countries should score better.

Regarding other labor standards, Germany has introduced a minimum wage in January 2015 at 1473 euro a month. In the Netherlands the minimum wage is a bit higher, 1501.80 euro. In Denmark there is no legal minimum wage. But, the unions are very active and take care that the employees get a healthy salary, therefore they keep the average minimum wage across all industries at around 20 dollars per hour. In Spain the minimum is 756.70 euro and in Lithuania it is 300 euro. The differences in minimum wages is significant: in Bulgaria it was 184.07 in 2015 and in the Netherlands it is more than eight times higher. The differences in labor costs are also significant. Denmark has the highest estimated hourly labor costs of 41 Euro. Bulgaria has the lowest labor costs per hour; not even reaching the 5 euro per hour. For the five representing countries the estimated hourly labor costs are: Germany 32, the Netherlands 34, Denmark 41, Spain 22 and Lithuania 6 euro per hour.74

Wage moderation in Germany was possible because the labor unions lost power in the last decades. Germany’s nominal unit labor costs grew annually 0.9% in the period 2000-2015. The average in the EU28 was 1.5%. The other four representative countries: 2.2% in Denmark, 1.7% in Spain, 2% in Lithuania and 1.8% in the Netherlands.75 Even though Germany’s labor cost per hour is five times higher than for example in Lithuania, the wage moderation resulted in relatively cheaper products.

72_Ibid.

73_{Central Intellegence Agency, The World Factbook, accessed on 27 April 2016} 74_Eurostat,_{http://epp.eurostat.ec.europa.eu/}_{, accessed on 20 April 2016}

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Singh and Zammit state that competitive erosion in labor standards also gets expression in de-unionization. The trade union density in Europe decreased in almost every country significant. In Spain the percentage of labor union members as share of total wage and salary earners fluctuates, but is more or less stable. In Denmark, Germany and The Netherlands the density decreased. For Lithuania there are no data available but the surrounding countries experience the same negative development as Germany. These data could indicate that there is an erosion of labor standards happening. However, it could also mean that employees do not need the labor unions anymore since the countries already respect the labor standards.

Van Parijs argued that Germany’s has a too strong export position. Other EU member states cannot compete with Germany anymore. Since they are in the monetary union, it is hard to protect themselves against Germany.76 The euro-zone experiences great imbalances, mainly caused by Germany and other ‘surplus countries’. Surplus countries are the member states that have trade surpluses, like Germany and the Netherlands. According to Servaas Storm, we cannot deny this anymore and the only way to overcome the crisis – especially for the southern countries – is to decrease the unit labor costs in the southern European countries.77

The imbalances of the euro area are not only caused by Germany and other surplus countries, but also by the EU and the eurozone themselves. The monetary unification has not led to convergence of the countries regarding productivity and trade products.78 This was already shown by the data on R&D expenditures. Germany’s dominance is not only to be found in their product range and the wage moderation but also in the non-price technology-based competitiveness. On top of that, the productivity in Germany is higher and grows faster than in the rest of the eurozone.79 The differences between the members of the eurozone brought the euro area in this crisis and obstructs it to overcome it.

Concluding remarks

The labor standards are in the European Union in comparison with the rest of the world high. Most countries rate 1 on a scale of 0 to 1, which means that most member states have full respect to labor standards. The countries in the eastern and southern parts of the EU score

76_{Philippe van Parijs, Agenda 2010: een model voor Europa?, Green European Journal, 08 January 2013,} http://www.greeneuropeanjournal.eu/agenda-2010-a-model-for-europe/, accessed on 19 March 2016

77

Servaas Storm, ‘German wage moderation and the Eurozone crisis: a critical analysis’, Institute for new economic thinking, 8 January 2016, https://ineteconomics.org/ideas-papers/blog/german-wage-moderation-and-the-eurozone-crisis-a-critical-analysis, accessed on 7 May 2016

78_Ibid. 79

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lower than the northern and western European countries but still to the rest of the world relatively high. The interdependency between the member states is high regarding the interstate trade of the countries. At the same time all countries except for two, export the same products. This all together creates competition. We focused on labor standards as a way to gain competitive advantage. For instance, high human capital is a source. Just like low wages and low labor costs. Education does not tell us much since all European inhabitants are well educated. However, the investments in R&D does tell us something about the quality of the products. Germany invests the most money in R&D and thus we can conclude that Germany is the most progressive country in Europe. Which means that Germany’s products are the most renewable. This underlines Storm’s statement that Germany produces high-value added, high-tech products and Southern European member states produce low-value added, low-tech products. In multiple ways it is hard for those countries to compete with Germany. There is no evidence for a European race to the bottom because the labor standards in the euro area did not change significantly the past years. The only remarkable development is the wage moderation in Germany. Therefore, it more seems like a German race to the bottom to keep their good export position and to keep their export surplus; the social dumping occurs within the German borders. Why did it take so long to introduce a minimum wage? What are the consequences for the minijobs? How does Germany’s long history of export surpluses fit in the story?

The German minimum wage: the solution for the European race to the bottom?