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Is Germany’s minimum wage really helping to reduce salary gap between rich and poor?

New figures released by the Federal Statistics Office (destatis) show that the hourly wage gap has been coming down for several years. But experts say that the picture isn’t completely rosy.

Published: 15 September 2020 10:06 CEST
Updated: 15 September 2020 11:38 CEST
Is Germany's minimum wage really helping to reduce salary gap between rich and poor?
Photo: DPA

It is a problem that has caused anger across the western world. Top earners are receiving ever more money for their work while low-income wages are stagnating.

Statistics released this week by Destatis show that the trend in Germany is heading in the opposite direction – at least for hourly wages.

Whereas in 2014 someone classified as a top earner was taking home 3.48 times the hourly wage of a low earner, that difference dropped to 3.27 in 2018.

READ ALSO: Minimum wage to rise in 2019 but poverty persists

Put another way, the average hourly wage of a low income earner (someone in the bottom 10 percent of the wage scale) rose from €8.34 per hour to €9.71 between 2014 and 2018. At the same time, the wage of a top earner (someone in the top 10 percent) increased from €29.03 to €31.76 per hour. 

“One reason for this development is the introduction of the statutory minimum wage on January 1, 2015,” Destatis states. In 2018, the minimum wage was €8.84 and it currently stands at €9.35.

The reduction of the wage gap was particularly pronounced in eastern Germany, where the percentage of people considered low income earners dropped from 34.5 percent to 29.1 percent.

At the same time there are still roughly twice as many high earners in former West Germany as there are in the east.

Smaller change than expected

Experts have cautioned though that good news from the statistics office doesn't necessarily mean that poorer people now have more money in their pocket.

Daniel Eckert, finance editor at Die Welt, reports that companies have reduced employees’ working hours since the minimum wage was introduced, meaning that although the gap in hourly wage has narrowed, the difference in monthly income between rich and poor has not changed.

Eckert also argues that the stagnation of wages in the top sector is not necessarily a good sign, as increases here are a signal that Germany’s companies well-paying sectors such as IT are enjoying international success.

READ ALSO: How the minimum wage has 'increased productivity' in Germany

Meanwhile, the German Economic Institute (DIW) in Berlin has estimated that 2.4 million workers still take home pay under the minimum wage due to the fact that they are pressured into working unpaid overtime.

The DIW therefore says that a new law is necessary to supplement the statutory minimum wage – one that requires companies to declare the hours worked by their employees.

“If the implementation of such a law were to help convert unpaid overtime into paid overtime, non-compliance with the minimum wage would probably also decline,” the DIW states.

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PROPERTY

Why buying property in Austria remains unaffordable for most

Buying a home in Austria is a dream for many international residents, but it remains out of reach for the average earner.

Published: 7 May 2024 12:30 CEST
Why buying property in Austria remains unaffordable for most

Many people living in Austria dream of one day owning a home, but despite recent drops in property prices and interest rates, this dream is still out of reach for many average earners. 

In Austria, it is recommended to not spend more than 40 percent of a monthly income on debt repayment.

But new analysis by tariff comparison portal durchblicker.at reveals that even a double-income household would need to spend around 60 percent of their income to afford a 90m² new-build apartment in Vienna.

While the government has created initiatives to improve the affordability, with attractive housing packages, fee reductions and eliminations of certain fees, such as the “Grundbucheintragsgebühr” (land register entry fee) and “Pfandrechtseintragungsgebühr” (mortgage registration fee) for properties up to a certain value, their impact has been limited.

Furthermore, the governments initiatives often overlook the specific needs of lower-income households and may benefit those who are already financially stable, leaving the average earner still struggling to afford a home, according to Der Standard.

READ ALSO: ‘Haushaltsversicherung’ – How does Austria’s home insurance work?

High prices, rates and strict lending criteria

One of the biggest barriers to owning a home in Austria is simply the sky-high property prices. Over the years, property prices have increased, making it more difficult for people with an average income to afford a place of their own. Even with recent minor dips in prices, they still remain high.

Another factor making owning a home challenging is the increase in interest rates in recent years. As a result, both existing variable-rate loans and newly obtained fixed-rate loans have become more expensive. Analysts expect the European Central Bank to cut interest rates by around 0.5 percent in the near future, but according to durchblicker’s calculations, this would initially only create a little relief for loan takers, where instead of around 60 percent, 55 percent of monthly household net income would be needed for debt repayment.

Another issue preventing many from realising their dream to buy a home is the difficulty in obtaining a mortgage. Since July 2022, stricter rules have applied in Austria for the granting of property loans. Loan applicants must have a deposit worth at least 20 percent of the value of their property to be granted a loan, according to the financial online platform Finanz.at. This means that even applicants with higher incomes may struggle to get their dream financed. 

Furthermore, many loan takers with variable-rate loans, especially those recently obtained, are facing significant challenges. The variable interest rates have increased significantly since the initiation of these loans, resulting in higher monthly repayments, reported Der Standard.

Few people can afford their own home in Austria, especially in Vienna. Photo by Christian Lendl on Unsplash

Experts suggests fixed rate loans and cooperative housing models

Andreas Ederer, Head of Banking at durchblicker.at, recommends loan takers with variable-rate loans to change to fixed-rate loans. He suggests that fixed-rate loans have become more attractive as they are currently cheaper than variable-rate loans, reported Kurier. 

Unlike fixed-rate loans, which have a steady interest rate throughout the loan term, variable-rate loans can change over time in response to shifts in market conditions or the economy.

Experts also suggest alternative models for increasing affordability. One idea is to create more opportunities for cooperative ownership with mandatory purchase options. This could offer a more affordable option where costs such as maintenance and taxes are shared. According to Der Standard, cooperatives also often have access to loans with better terms.

READ NEXT: How can I move into affordable cooperative housing in Vienna?

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