Category: Germany

Does Minimum Wage Affect Unemployment: Essay

Literature Review:

In January 2015 Germany passed a statutory national minimum wage (NMW). This is the first time Germany has had an economy-wide minimum wage. It was introduced at a level of €8.50 per hour. Previously there were only minimum wages in specific sectors of the German economy. The introduction of a minimum wage has been extensively debated by both economists and policymakers. It was argued that it would have significant negative implications on unemployment because a large proportion were set to receive a wage rise (13.3% of all employees) Seebauer (2018). But those predictions thus far have proven to be inaccurate. It is used as a tool for anti-poverty and to stop the exploitation of workers. International evidence on the impact of an NMW on unemployment does not give a clear result and is inconclusive. There have been several studies in this area providing different results. Either a positive, negative, or no effect.

Standard economic theory would suggest that the impact of imposing an NMW would increase unemployment. Firms faced with higher costs for labor will reduce their demand for it and will aim at improving their productivity and adopting new technology. An alternative view discussed by Card and Krueger (1993) is that a rise in NMW would decrease unemployment. This is if a firm has monopsony power. Whereby a firm faces an upward-sloping labor-supply schedule and since there has been a rise in the minimum wage, workers that would have previously not worked to fill these vacancies decide that the wage is at a level that they will work and the vacancies fill.

Moving on to assess the existing literature. Firstly, looking at the UK. Stewart (2004b) uses the difference in difference estimator to assess the effect of the introduction of an NMW in 1999. This is where you compare the treatment group, a group of employees whose wage is just below the NMW that has been set. The control group is a group of employees whose wages are slightly higher than the NMW introduced. The results showed that there were no adverse employment effects in any of the three data sets used or in the four demographic groups (male, female, adult, and youth). Criticisms of this approach included that there may be measurement errors in wages and the spillover effects of the NMW further up the pay distribution. Potential spillover effects are lower separation and hiring rates (Brochu and Green (2013)). Another approach used to measure the effect of an NMW on employment is to look at specific regions and was first proposed by Card (1992) who looked at US data and found no adverse effect. This method is used because it is recognized that there will be a greater impact in regions where more workers earn closer to the minimum wage. The bite of the minimum wage determines which regions will be most affected. It is the ratio of the minimum wage to median hourly wages and is known as the “Kaitz index” (Dube (2019)). This index in a specific area is then related to the employment rate. Dolton et al (2012) conclude using this approach that there is a statistically significant positive effect of the NMW on employment between 2004 and 2006. In Machin et al (2002) instead of testing for regions in which the NMW would have the largest bite they analyze the effect on the residential care homes industry. In this sector, one-third of workers were paid below the NMW that was set to be introduced. The results showed a rise in unemployment and cuts in hours worked. Caution for reaching conclusions must be taken as a particularly low-wage sector was chosen for analysis.

Now examining the literature that has been written on the NMW impact on unemployment in Germany since 2015. The data available has provided difficulties as there has been non-compliance by firms so greater regulation and enforcement needs to occur to fully determine the effect of Germany adopting an NMW. Testing the effect using the regional comparison approach Caliendo et al (2017) find no significant effect. However, their work is undermined because the minimum wage was not fully binding when carrying out their tests. In addition to this piece of literature, Bonin et al (2019) use this same approach and also find that there has been no significant effect. An interesting argument made for why there has been no real impact is that because of the implementation of the minimum wage, some workers became discouraged from looking for jobs and withdrew from the labor force. This means that these individuals are not taken into account in the calculations of unemployment levels. Boffy and Ramirez (2019) found this to be the case in the United States between 1990 and 2017.

Project Outline:

Research Question: What is the effect of Germany introducing a minimum wage on unemployment in the retail sector?

Motivation:

Given that Germany only passed a national minimum wage in January 2015, there is limited existing literature on the impact of this on unemployment. Especially when compared to the literature on this topic in the United States and the United Kingdom. This paper will use empirical analysis and econometric modeling to help determine the effect of the NMW on unemployment. Looking specifically into the effect in the retail sector.

This paper will be able to analyze the effect of the NMW over a greater period than previous papers which have only analyzed the impact over the short run (2 years). This will allow for a more robust analysis and allow us to gain a deeper understanding. Furthermore, after the introduction of the NMW, wage changes take time to implement so by analyzing in 2019 the impact will be more visible to see.

In this paper, the retail sector will be analyzed because it is a sector in which a large proportion of the labor force earns around the minimum wage. The potential effect on outcomes is far greater than in sectors in which workers were already paid well above the minimum wage such as in financial services. The disadvantage to specifically analyzing the retail sector is that there will be a greater ‘bite’ and so a larger potential negative effect.

Objective:

To determine both the direction and magnitude of the implementation of the minimum wage in Germany on the level of unemployment in the retail sector. Although this will not be conclusive in determining whether or not Germany adopting a minimum wage was beneficial as other macroeconomic and microeconomic factors have to be considered it will be one way of understanding the impact it has had.

Economic Significance:

The level of unemployment is an important measure in determining the health of an economy. And because minimum wage is introduced to try to reduce poverty and the exploitation of workers. Examining the impact of NMW on unemployment is a highly important and well-debated economic issue. Furthermore, because a large proportion of workers in a sector such as the retail sector will receive a higher wage because of the introduction of an NMW it is important to determine whether this is beneficial to their employment prospects.

Data and Methodology:

To conduct a comprehensive study on the issue requires robust and reliable data. The (German Socio-Economic Panel) GSOEP will be where I will be collecting the data for this paper. It is an annual survey of 16,000 representative households.

This paper will use one of the approaches that was discussed in the literature review. Whereby conducting a difference in difference estimate on unemployment data before and after the NMW introduction in the retail sector (treatment group) and the financial sector (control group). The financial services sector is chosen as the control group as the NMW will have no impact on this sector. The retail sector is the control group as it is the focus of our analysis. The DiD is a quasi-experimental design that will allow us to estimate the effect on a sector that it was specifically meant to benefit. A common approach used in previous literature. Potential issues that need to be considered when analyzing results are first, there may be endogeneity as all exogenous variables will not be able to be considered in the regression of minimum wages on unemployment. The effect of minimum wages may not be all translated into unemployment it could also lead to a reduction of hours worked so this paper will analyze if this has potentially occurred. Furthermore, the DiD approach assumes no spillover effects when in fact there could be.

Contribution to literature:

This paper aims to contribute to the existing literature to gain a further understanding of the impact of the NMW on unemployment in Germany. By looking into the retail sector where there is limited if any literature on the effect this paper can provide insight into the impact of imposing an NMW on a low-wage sector and could be of benefit to other countries considering an NMW.

Importance of Cross-Cultural Competencies in Transnational Companies: Case of Tesla Factory in Germany

Introduction

Multi-national companies are increasingly prevalent in today’s global market, however cross-cultural competence including communication is a core aspect. Cross-cultural competence is integral to communications and having global companies work with teams in different countries; it is about understanding one’s own culture and that of the counterparts with varied values, belief systems, attitudes and language and adjusting communication to befit each cultural interaction. In the Resetarits and Ankel article for Business Insider, the crux of the issue is cultural competence and differences being managed effectively. Should Elon Musk open the newest factory in Berlin given that there will be cross-cultural differences in communication, working conditions and economy between the United States and Germany? With previous multi-national companies such as Walmart, Amazon and Chrysler not successfully operating within Germany, it is a question of whether Tesla will approach the operations with a new factory in Berlin appropriately to foster success. This report considers the announcement by Elon Musk including exploring the cultural differences between the United States and Germany, identifying the issues such as communication styles and attributes and the different working cultures and economies. Furthermore, the report will make recommendations relating to whether it is a viable and effective decision.

Cultural Differences

Directness, Tightness, Looseness

The cultural differences between Germany and the United States are somewhat subtle but present and for Tesla to invest in a factory in Germany, the company’s Executives need to understand the similarities and differences between the cultures in order to make interactions successful. While both Germany and the US have a low power distance, which means there is less distance within the social and organisational hierarchy and more expectation of equality, they do differ when it comes to language and approach to work. “Cultural values, or a consciously and subconsciously held set of beliefs and norms that define what is right and wrong” (Yang, 20156, pg. 1079). According to Cultural Atlas (2020) for SBS, German people generally view being organised and pragmatic as important including punctuality and being direct (Cultural Atlas, 2020) while the United States’ culture is less concerned with punctuality and people are less openly direct or critical in a direct manner. The Resetarits and Ankel article for Business Insider notes that in the Daimler-Chrysler merger, the Americans found that their German counterparts were rude in their communication while the German Managers believed that were simply being direct (Resertarits & Ankel, 2019). Additionally, criticism by individuals in the US is more subtle while in Germany, German people tend to be open to criticism and praise less (Resertarits & Ankel, 2019). If Tesla was to operate a new factory in Germany, the employees of the US would be less likely to openly criticize their German counterparts and would expect more praise while German employees would be more likely to openly criticize if need be and be firm and direct in their expression of opinions and ideas. The tightness and looseness of cultures also influences multi-national companies such as Germany and the US where “tight nations are expected to have a much higher degree of situational constrain” (Gelfand et. al., 2011, pg. 1101), whereas looser cultures are expected to have less situational constraint and afford a wider range of behavior; in this case, Germany is the tighter culture of the two and expects more behavioral conformity out of its residents.

Uncertainty Avoidance-Indulgence/Restraint

German people tend to dislike uncertainty in the face of things such as organisations’ intentions and strategies while in the United States, people tend to manage uncertainty in a different way. The US scores a low score with uncertainty avoidance which reflects that they can cope with uncertainty even in business practices as aforementioned. According to Hofstede Insights (2020), Germany scores on the higher end when it comes to uncertainty avoidance as they prefer organisation and knowing what is happening at the time or in the imminent future. Take up of new technologies would therefore be slower than in the US and Germans would be less willing to adapt to new ways of operations if Tesla was to run a factory with German employees in Germany. In the global market, the success of a multi-national company is dependent on their strategies for marketing to target audiences of different cultures (Nacar & Bernaz, 2011, pg. 275). Tesla would need effective strategies to market the company in Germany in a conducive and befitting manner. Additionally, in relation to indulgence versus restraint, Germany scores high as a restrained culture with less focus on leisure time and indulgence (Hofstede Insights, 2020). However, the United States scores higher with indulgence with more value on leisure time and individuals tend to have a weaker control over their desires (Hofstede Insights, 2020). In terms of Tesla’s factory in Germany, United States counterparts would be more focused on leisure time around work than their German counterparts; German culture suggests that people would be organised, pragmatic and work hard with commitment to success while the US employees would work hard in order to reap the rewards of leisure time and value their time off.

Scheduling

German people tend to work out exactly when and where a meeting will be taking place and for how long and what will be happening. They tend to prefer strict organisation over loose details (Cultural Atlas, 2020). Conversely, in the United States, meetings might be arranged and scheduled in but may run over time and agendas may be set but discussion is more likely to skew away from the essentials of the topics. Therefore, if Elon Musk was to operate a factory in Germany, Tesla needs to be open to cultural competence within employees so that conference meetings between employees of the two countries respect each other’s attitudes towards organisation and time. “International literacy and cross-cultural understanding have become critical to a country’s cultural, technological, economic, and political health” (Derkun, 2010, pp. 74-75). It is important to have cross-cultural understanding when managing a multi-national company.

Language and Communication

Language is an obvious difference between Germany and the US with most of Germany speaking Hoch Deutsch or High Deutsch (German) and the United States being an English-speaking country. Since all communication is cultural, when a message is sent it needs to be decoded by the recipient who understands it in the context of their culture. Therefore, the directness of German culture means that communication will be direct and clear, with a purpose and intention while counterparts in the US might interpret this as arrogant or discourteous. To manage cross-cultural communication, strategies for success include avoiding stereotyping, actively listening to what the other is trying to express and asking questions to determine whether one has comprehended the communication correctly. Translation of communications also can be difficult as grammar and vocabulary are different therefore translations will not be exact word for word; this can be means for miscommunication and misunderstanding between the two parties if they come from two different cultures and speak two different languages.

A PESTLE Analysis

A PESTLE analysis shows that socio-culturally, Germany and the US are quite diverse; the worldometer (2020) and the United States Census Bureau report vast differences of more than two hundred thousand in population and its growth in the years. The power distance is low and Germans tend to value egalitarianism over hierarchies as do people generally in the United States. According to Cultural Atlas (2020) for SBS, privacy is extremely valued by German people and they tend to keep personal information to themselves including socio-political views when they first meet people and they tend to keep a distinction between their work and personal lives, rarely mixing the two (Cultural Atlas, 2020). The culture of the United States tends to be less focused on privacy and people do often share personal information more readily and mix professional and personal lives such as socializing with colleagues. Another socio-cultural aspect is masculinity and femininity and the roles which genders face: German women are perceived as having greater flexibility to fill traditionally male-dominated roles while in the United States, post-war, many women returned to domestic duties yet many women have embraced feminism and the right to equality when it comes to employment (Wilde & Diekman, 2005, pg. 194). Social organisation of the countries’ males and females can influence the way a multi-national recruits and trains employees and the way they are perceived in the particular roles.

The Economies

Economic attributes such as unemployment is roughly the same in 2019-2020 for both Germany and the US with Germany being three-point-two percent and the US at three-point-five percent (Trading Economics, 2020). As Germany is a more restrained culture than the US which tends to be more indulgent, technological diffusion is slower in Germany than it is in the United States. Germans are slower to respond to innovation while the US is quite rapid to absorb new innovative technologies and changes. In addition, as per the Resertarits & Ankel (2019) article, German laws and regulations are quite strong when it comes to labor hire and working conditions with Germany being more strong in focus on “working on Sundays, holiday entitlements, and sick leave” (Resertarits & Ankel, 2019). The article seems to convey that the labor union is more on top of working conditions for labor hire and have more stringent guidelines to follow than in the US.

Recommendations

Cross-cultural Communication

Given the cross-cultural communication difficulties that can occur based on cultural differences, one might question whether Elon Musk’s announcement of Tesla heading a new factory in Berlin is a wise move. “Organisational cultures (private, public, non-profit, government organizations)” (Zlomislic, 2016, pg. 435) are one aspect of culture and Tesla would need to develop an organisational culture, one in which the US and German employees understood one another and operated within the same “culture” with shared mission statements and values. Given that Germany and the United States are both low-context cultures and have similar power distance, similar understanding of communications and hierarchies exist yet there remains the language difference. Translation can be difficult when it’s not exactly what one articulated but if Tesla utilizes German people who speak English as a second language, this could help the situation but would not necessarily be perfect as their English might not be Advanced or fluent. Both being individualist and low context cultures rather than collectivist and high context means there is less implied meaning or understanding of shared values which can cause miscommunication among employees of Tesla between the United States and the German factory. “Cross-cultural communication is more relevant in today’s heterogeneous world of social order, which is impacted by globalization and the rising cross-cultural nature of business negotiations and business communication in multinational businesses. Thus, cross-cultural communication enables people to effectively communicate and appreciate other cultures, and this is critically important in international management practice” (Abugre, 2018, pg. 173).

Working Conditions

Tesla would additionally need to take into account the labor hire and working conditions and pay employees accordingly otherwise they may face the same fate as Walmart and Amazon with the former company criticized for its working conditions of employees and the latter pulling out of Germany. Yet the question of whether Tesla should invest in a new factory in Berlin remains and it is my recommendation that they cannot achieve this even with careful scrutiny and mindfulness of the various aspects discussed surrounding language barriers and communications, labor hire and working conditions. It was reported in the article in Business Insider that Elon Musk has a background in poor working conditions for the Gigafactory in Nevada which has seen employees working seventy-hour weeks and production in tents (Resertarits & Ankel, 2019). This would not be permissible in Germany and the labor union would likely be called in to assess the situation. If they are the working conditions in Nevada, then it is highly unlikely that Tesla can be successful with hiring German employees and catering for German requirements.

Conclusion

Cross-cultural competence is a necessary aspect of being a multi-national company; these type of companies require teams with cross-cultural competence, that is the understanding and the ability to understand their own culture and that of the other country’s, in this case Germany, and adapt communications to suit the cross-cultural interaction. Elon Musk’s announcement that he plans to develop a Tesla factory in Berlin is not recommended due to the cultural differences between Germany and the United States. While they both might be low context and individualistic cultures, they differ in terms of pragmatism, ways of communicating including language and forthrightness or directness and working conditions. Since Tesla is known for poor working conditions in a factory in Nevada, this would not be legal or ethical in Germany and therefore issues would arise with the German employees. The cultural differences extend naturally to language which because of the individualist and low context nature of both cultures can mean miscommunication and misunderstanding can occur as there is no shared value system or implied intention as per high context cultures. Therefore, with Germans not expected to speak perfect English to liaise with their US counterparts, miscommunication is likely. Success would be dependent on Tesla investing money in cross-cultural training to enhance cross-cultural competence among employees.

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