It should be party time for the Germans with growth better than the rest of the EU and unemployment at its lowest level since 1991. But the mood is definitely subdued. Conversation is not about what they should do with their money, but where is it? Economists consider it as the model for Europe, but if you look beyond the record export figures and company profits, you see a very different picture.

Germany might be getting richer, but the average German is getting poorer. According to a recent study by the University of Duisburg-Essen's Institute for Work, Skills and Training, those earning less than €9.15 (£7.40) per hour actually increased by 2.3 million to 8 million between 1995 and 2010. Of the total workforce, 23% of employees make less than €9.15 per hour and the gross monthly salary for 800,000 is less than €1,000 (£808).

"While conditions for employees working directly in the export economy are generally good, those in the domestic economy, particularly the service sector, are often badly paid and have poor job security and that trend is growing. Women and young people are particularly badly affected," says Claus Matecki, federal executive board member at the Confederation of German Trade Unions (Der Deutsche Gewerkschaftsbund, DGB).

Germany was once famous for its social market economy (Soziale Marktwirtschaft), a policy that ensured workers, industry and the state existed in a highly-productive symbiosis. But since the mid-1990s, that has eroded. Privatisation, deregulation, labour reforms and the growth of temporary employment and outsourcing have all undermined the position of employees, particularly in unskilled jobs. "The challenges of the future are to increase protection for those on short-term contracts and to get a minimum wage of €8.50 per hour," says Matecki.

Incredibly, Germany still has no mandatory minimum wage. According to the DGB, based on legally-employed workers, there are now 1.4 million receiving less than €4 (£3.23) per hour, 1 million are on short-term contracts and 7 million are so-called mini-jobbers, earning €400 per month £323) and 70% of them have no other job. Taking those numbers into consideration, Germany's impressive employment figure loses a lot of its shine. "Many workers in unskilled jobs are working at subsistence level and have to receive state subsidies to survive. In effect, the employers are using the state to pay their employees," Matecki points out.

Many sectors have, nevertheless, agreed on a minimum wage system. For example, skilled workers in the construction industry earn €13.40 per hour, while the unskilled earn €11.05. Trainers in vocational education earn €12.60 an hour; cleaners only €8.82. However, if a company is not a member of a trade association, then it is not obliged to pay the going rate.

Temporary workers get a particularly bad deal. Many take a temporary contract in the hope that it will lead to full-term employment, but it rarely does. Instead, the contract is renewed, not only reducing the wage bill but also avoiding costly severance terms.

The argument that paying a minimum wage will reduce employment and competitiveness is one that business likes to revert to, but it contradicts the evidence, says Gerhard Bosch, professor of employment and economic sociology at Duisburg-Essen University: "In many branches there are minimum wage agreements and comprehensive independent research has shown that does not lead to job losses. In fact, you can argue that good wages create employment."

The fact that 50% of the population has no forms of savings or assets shows that low pay is not just a problem restricted to the unskilled sector, either. Children, too, are suffering. In Unicef's latest report on child poverty in rich countries, Germany is ranked 15 in terms of child deprivation, behind the UK (nine) and Spain (12).

Although its labour reforms might be hurting, some economists say the medicine is necessary. "We were the sick man of Europe six years ago," points out Dr Joachim Scheide, head of the forecasting centre at The Kiel Institute for the World Economy. "Our reforms have made it easier for people to find work. While pay and employment terms may not be as generous, at least people are working – most countries envy us for that."

But the laissez-faire wage policy is now worrying many Germans like Andreas M, 62, a former technical sales manager at electronics and electrical engineering giant Siemens, now retired. "I got a very favourable early retirement package, but I'm the last of a generation. But where are we today? Many are getting laid off now with very little compensation and being replaced by contract workers.

"The remaining permanent staff don't have the same severance terms and their wages are relatively much lower. To keep competitive in a global economy, we all understand that means more pressure and less pay, but there's a feeling that companies are now exploiting the labour market and it's getting way out of hand. There's no question we need a minimum wage."

External forces

In the retail industry, most of the major stores pay their permanent staff fair rates, but many are now outsourcing services such as shelf-filling, warehousing and cashier work with some of the major chains relying on external suppliers for up to 40% of their workforce.

According to the DGB, permanent staff at Aldi, with two years job experience, earn about €2,200 a month (£1,778). That's €1,400 (£1,131) net after paying health insurance, pension contributions and unemployment protection – the tax rate can vary considerably depending on family status. Holiday is normally 30 days and redundancy terms fair.

But those working for suppliers and performing the same tasks are employed as temporary workers and earn about €6.50 per hour (£5.25), often on a mini-job basis. They are not entitled to employee pension or sickness contributions, have no holiday pay and can be fired and re-hired by the same employer up to four times in three years. Julia H, a single-mother with two children who works about 30 hours a week, relies on income support for food. "Germany desperately needs a minimum wage. It's vital for the economy and society."

In Britain, Aldi pays £6.90 an hour (£7.90 in the London area) with four weeks holiday. That's around £1,196 a month gross for a 40 hour week – significantly lower than permanent staff in Germany but above typical rates for temporary workers. Tesco pays around £6.40 an hour in most of the UK, but £8.15 in London.