December 23, 2014 / 12:37 PM / 3 years ago

Anxious German employers gear up for minimum wage revolution

People walk into the the Mall of Berlin shopping centre in Berlin, December 10, 2014.Fabrizio Bensch

BERLIN (Reuters) - Michael Pirl is about to raise prices at his hotel in rural east Germany to cover a spike in labor costs as a national minimum wage takes effect, and he hopes new events like dinner shows will keep the customers coming.

Like most German employers, he'll have to pay all his 74 staff at the four-star Ringhotel "Zum Stein" at least 8.50 euros an hour from Jan. 1 and he's worried about how this will impact business at the retreat 130 km (80 miles) southwest of Berlin.

"To what extent can you persuade guests to continue buying or consuming the same amount of products? If the beer or wine gets more expensive, would you drink the same amount as before?" he said. Maintaining the hotel's existing salary structure will increase his wage costs by 8 percent.

Chancellor Angela Merkel's government agreed in April to introduce Germany's first country-wide wage floor in a victory for the Social Democrats (SPD), who made it a condition for joining a coalition with Merkel's conservatives last year.

Some economists believe the reform will boost consumption - which Berlin is relying on to drive economic growth - while others say it could reduce purchasing power if it causes firms to cut jobs or hike prices.

More than one in four German firms expect to be directly affected. Of those, more than half said they would need to take counter-measures such as cutting staff or increasing prices, a survey by the Munich-based Ifo institute found.

The law comes at a time when Europe's largest economy has cooled and the government faces pressure from European partners to boost weak investment.

While 21 out of 28 European Union states have a minimum wage, Germany has long resisted, using sector- or region-wide collective wage deals. But these have become far less frequent since 1998.

Trade unions have broadly welcomed the change of tack, mindful of the sharp expansion of the low-wage sector since 2003, when Gerhard Schroeder, Merkel's SPD predecessor, liberalized labor laws. Reports have since surfaced of workers earning as little as 2 euros an hour.

JOB CUTS?

The minimum wage is expected to weigh hardest on firms in the east, where workers earn less than the national average and fewer are covered by collective deals. Hotel and catering industry body DEHOGA said staff costs could surge by around 20 percent in some regions.

But how the reform will affect the labor market seems harder to call, with some economists seeing little impact, while others estimate up to 570,000 positions could be lost.

Mario Ohoven, head of a lobby group for the Mittelstand - the small and medium-sized firms that form the backbone of the economy - said the new law would be a "job killer".

"Job cuts, declining investment and higher costs are the price that companies and citizens will pay for what is supposedly a great social achievement," he said.

Ohoven said around a third of bakeries in the east faced the threat of closure and that the new legislation put hotels and restaurants, where the share of staff costs is particularly high at up to 40 percent, in a tough position.

Enzo Weber of Germany's Institute for Employment Research (IAB) said there was a risk that the minimum wage would slam the brakes on rising employment, though he saw no major impact on jobless numbers.

"The minimum wage increases costs for employers but can also have positive effects like filling vacancies and providing job stability," he said.

But back at the Ringhotel, Pirl is taking no chances. He plans to cut costs by holding off on investments and, at least for now, not replacing any staff who leave.

Additional reporting by Holger Hansen; Editing by Madeline Chambers and John Stonestreet

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