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Wednesday, 27 June 2012

France raises the minimum wage. Is that a total waste of money? Or does François Hollande have a point?!

If there is one thing that I struggle with, it is the average wage for labor that is paid to workers in The Netherlands.

I think that everybody should earn a decent income that someone, who is alone or with a family, can live from, without feeling like a beggar or a second-rate person. This goes for the CEO of a company, but also for the cleaning lady, the maintenance man and the nightporter. For farmers and civil servants. For the fire fighter and the garbage man.

The degree of civilization of a country can be measured by the lowest incomes and the quality of life of the people that earn such an income. You don’t want people to be too poor to live, but too rich to die.

On the other hand, every time when I go to a shop with an electric tool or household appliance that has a seemingly small malfunction, I get the message: “Sorry sir. You have to replace it. The check up would cost you more than the purchase price of a new item, due to our repairing fee”.

There goes the perfectly looking flat-iron, electric toothbrush, television set, power drill or… you name it. To the recycle bin or the scrapheap. At the end of its lifecycle, before life started even properly.

But hey… the new television set or electric toothbrush in The Netherlands costs you only a moderate amount of money. Due to the (still very) low incomes that people in the Far East and in South-Eastern Europe earn.  And to the fact that a lot of factory-owners in Far Eastern countries look the other way when the subject child labor is mentioned. The misery of their overworked and underpaid workers is our good luck.

Still, it bothers me that we have to throw away so many easy-to-repair stuff, because repairing it would be too expensive; especially due to the ubiquitous usage of micro-electronics and glued housings.

My late father-in-law, Grigoriy Ilich Furman, who I unfortunately never met, was a wizard with repairing things: radio’s, television sets and everything that became defective; you name it… he could repair it. Due to the simple and robust Soviet/Russian technology of tools, household appliances (and everything else) that lagged 20 years behind western state-of-the art technology and design. This arrears in design made Soviet/Russian-made tools / appliances not very beautiful (to be frank: quite ugly), but on the other hand very easy to repair. Due to the very low average wage in Russia, it was often worth your wile to repair that old mixer, sewing machine or Lada car, instead of purchasing a new one.

These are the reasons that I have mixed feelings on the high average incomes in the Western European countries.

Today at Twitter, there happened one of those very interesting discussions that you sometimes get after news is published in the official media and dropped into Twitter. The news in the spotlights was that the freshman President of France, François Hollande, had decided to raise the French minimum wage by a total of 2% aka €21 per month.

Here are the pertinent snips of an article in the Financial Times that covers this subject:

France’s socialist government announced the first real-terms increase in the minimum wage for six years on Tuesday, but limited the rise to 0.6 percentage points above inflation as it sought to balance election promises with fears of damaging employment.
It also confirmed it would introduce a 3% tax on company dividends, increase wealth and inheritance taxes and abolish a tax “shield” – or ceiling – for the wealthy in its effort to meet its targets of cutting the budget deficit to 4.5% of gross domestic product this year and 3% in 2013.

But the government also signalled a freeze over the next three years in nominal terms in a swath of public spending, saying the budget deficit effort would be balanced between tax increases and spending cuts.

Business leaders, the conservative opposition and even German government leaders have criticised early moves on the economy by president François Hollande as being contrary to reforms required to restore France’s badly diminished competitiveness and flagging growth.

But Mr Hollande has been scrupulous in meeting key election promises such as boosting the minimum wage and restoring the right for some workers to retire at the age of 60 – while pledging to hit France’s obligations on its public finances.

Michel Sapin, labour minister, said the minimum wage would rise by 2% to €9.40 an hour from July 1, of which 1.4% was accounted for by inflation. It is the first time the base wage, which affects one in six workers, has been raised above inflation since a 0.3% boost in 2006, before former president Nicolas Sarkozy in effect froze it in real terms.
Mr Sapin said there would be no further increase in January, the usual date for an annual revision.

… the CGPME, which represents small and medium-sized businesses, said it was a “political decision that will have negative economic consequences”, adding to France’s already high labour costs and threatening investment and employment.
“It is feared that this measure will translate into the destruction of tens of thousands of jobs among the least qualified,” it warned.

Then the discussion broke out between two distinguished commentators, known from the financial/economic TV-program RTLZ ( and BNR Radio (, as well as written financial/economic media: Mathijs Bouman and Hans de Geus. Mathijs Bouman has in general a liberal/conservative, rightwing point of view (i.e. the VVD view), while Hans de Geus has in general a more leftwing, labor-ish approach.

Mathijs Bouman thought that Hollande’s action of raising the minimum wage was a stupid one that would put the French workers in an even more unfavorable situation, compared to their German counterparts. This would lead to a loss of competitiveness and jobs in France and thus to even more unemployment, as the French workers would not be able anymore to compete with their cheaper counterparts in other countries.

Hans de Geus responded with a very interesting article in the Dutch magazine De Groene Amsterdammer (link in Dutch), arguing that the minimum wage is only earnt by people in services jobs, like cleaners, hairdressers, garbage men or employees of fastfood restaurants.

Lowering the minimum wage could lead to a domestic race to the bottom, while it doesn’t supply many extra jobs in the country (do you know someone who visits a hairdresser in his neighboring country, because the hairdresser in his own town is too expensive?)

It could also lead to poor, working people that need multiple jobs to earn their family income, as one job doesn’t supply enough money to do so. In the process, people that are unemployed and live from a welfare benefit will become really, really poor.

Everybody that saw Michael Moore’s documentaries Bowling for Columbine or Fahrenheit 9/11 knows what poverty-while-having-a-job looks like.

Therefore the main question of this argument remains: is François Hollande right or wrong with raising the minimum wage? One clue can be given by the red text in the aforementioned snip: It is the first time the base wage, which affects one in six workers, has been raised above inflation since a 0.3% boost in 2006, before former president Nicolas Sarkozy in effect froze it in real terms.

If I understand this snippet right, it means that the base wage didn’t rise at all since 2007 until this year, not even by the inflation amount. This means effectively lowering the minimal wage rate.

If Mathijs Bouman is right, this 5-year period of wage restraint should have given a boost to French unemployment: if increasing the minimum wage amount leads to less jobs, than decreasing the minimum wage amount should lead to more jobs. That is logical, isn’t it?!

Fortunately, it is quite easy to obtain the French unemployment statistics from Eurostat ( over the last five years.

French unemployment from 2001-2012
Data courtesy of:
Click to enlarge
To be fair: there has been a drop in unemployment in France, since the period of wage restraint started in January, 2007. However, was that drop in unemployment due to the wage restraint? Or was it because the French economy was at the peak of a period of conspicuous and hedonistic consumption (just like many other economies in the world) and France had a new, fresh and bold president Nicolas Sarkozy?! Who can tell?!

The effect of wage restraint becomes stronger, the longer it lasts. Still, the party in France was over in May, 2008. After that time the French unemployment started to rise like a rocket before the credit crisis really lifted off in Europe, only to end at the level of 10.4%, unprecedented in the zeroes in spite of the wage restraint.

That the effect of wage restraint has (at best) been very small is proved by comparing the French unemployment figures with the Dutch unemployment figures over the same period. As you might know, the Dutch didn’t have wage restraint in those days
French and Dutch unemployment, compared from 2001-2012
Data courtesy of:
Click to enlarge
The improvement in employment in the period before May, 2008 is just as strong in The Netherlands as in France. You could conclude here that wage restraint for the minimal wages didn’t help the economy very much in France. And after May, 2008 the unemployment in France rose much faster than in The Netherlands (mind here that the chart has two vertical axes. In reality the Dutch unemployment is much lower than the French, but I put them together at the same scale for purposes of comparison).

So there might be an amount of truth in the story that wage restraint among minimum wages helps to reduce unemployment, but the French case proves that the positive effect was moderate(at best) and lasted only for a very short period of time.

In case of the German situation with an overall wage restraint, the effect might have been bigger. The cost price of produced goods becomes lower and thus the sales price too. However, also in this situation wage restraint had a lot of negative side-effects: not only for the German workers and civil servants that became effectively poorer as a consequence of inflation, but also for the other Euro-zone countries that see their competitive position deteriorate as a consequence of this ‘beggar thy neighbor’ tactics. 

Besides that, wage restraint hits often especially the people with the lowest wages, as their job doesn't require much training at first glance and there are enough people to take it over. That is why these are the first people to accept wage restraint: 'for you there are ten others, if you don't accept reduced payment'.

Besides that, the success of the German factories and worldfamous brands can not so much be owed to their cost and sales price, but to their superior  quality in almost any kind of manufacturing. If only cost and sales price would matter, everybody would drive a Landwind car, instead of a European, Korean or Japanese car. Fortunately, almost nobody doesn’t... and for a very good reason.

This example discloses that there is one much more important factor for employment and general prosperity in a country: education and training on the job. With this I do not only mean education at university or college-level, but also good technical education at a lower level; education where people learn technical engineering, welding, metal and wood working, carpentry, plumbing, concrete handling and bar bending, electrotechnique and miscellaneous technical jobs. These are all jobs that people with an university level often treat with disregard, but that are indispensable for a modern industrial country: a country like Germany or France for instance.

Therefore my conclusions can only be that Hollande is right by handing out the poorest workers their long overlooked minimum wage increase (since 2007) and that the Small and Medium Enterprise representatives, in my very humble opinion, should not whine about a lousy € 252 wage increase per year, inclusive 1.4% inflation compensation.

However, what could make François Hollande’s presidency even more convincing, is when he makes the French economy more competitive: not by leading the race to the bottom in wage costs, but by:
  • improving French education at the highest and especially the lower levels; 
  • by getting rid of useless government regulation and (semi-)local government layers that add nothing to the French society, but cost billions of euro’s;
  • by getting rid of the dozens of often inefficiently operated, stateowned companies; 
That would be great when Hollande could achieve this, although it is probably not what chancellor Angela Merkel of Germany wants to hear.

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