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Minimum Wage Incidence: The Case for Germany

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  • Andreas Knabe
  • Ronnie Schöb

Abstract

This paper analyzes the impact of a statutory minimum wage on employment, wage inequality, public expenditures, and aggregate income in the low-wage sector for two scenarios: a competitive labor market and a monopsonistic labor market. Using data from the 2006 wave of the German Socio-Economic Panel (GSOEP), we show that irrespective of which scenario adequately describes the labor market, a statutory minimum wage reduces employment and raises public expenditures. While aggregate income in the low-wage sector increases, poor households (i.e., those eligible for Unemployment Benefits II), do not benefit from a minimum wage. Wage subsidies at the same fiscal cost ensure more favorable employment effects in both scenarios. However, the workers' income depends on whether we have a competitive or a monopsonistic labor market. A wage subsidy ensures higher household income in a competitive labor market but leads to lower income gains in the monopsonistic scenario. Furthermore, wage subsidies lead to a more equal income distribution than statutory minimum wages, irrespective of their incidence. Combining a minimum wage with a compensating wage subsidy, similar to the French minimum wage system, is extremely costly while still inferior to pure wage subsidies.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 65 (2009)
Issue (Month): 4 (December)
Pages: 403-441

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200912)65:4_403:mwitcf_2.0.tx_2-s

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Keywords: minimum wage; monopsonistic labor market; wage subsidies;

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References

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Citations

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Cited by:
  1. Bredemeier, Christian & Juessen, Falko, 2012. "Minimum Wages and Female Labor Supply in Germany," IZA Discussion Papers 6892, Institute for the Study of Labor (IZA).
  2. Müller, Kai-Uwe & Steiner, Viktor, 2010. "Labor Market and Income Effects of a Legal Minimum Wage in Germany," IZA Discussion Papers 4929, Institute for the Study of Labor (IZA).
  3. Kuddo, Arvo, 2009. "Labor laws in Eastern European and Central Asian countries : minimum norms and practices," Social Protection Discussion Papers 51698, The World Bank.
  4. Müller, Kai-Uwe, 2012. "Estimating the employment effects of a minimum wage from a cross-sectional wage distribution. A semi-parametric approach," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62019, Verein für Socialpolitik / German Economic Association.
  5. Kai-Uwe Müller, 2010. "Employment Effects of a Sectoral Minimum Wage in Germany: Semi-Parametric Estimations from Cross-Sectional Data," Discussion Papers of DIW Berlin 1061, DIW Berlin, German Institute for Economic Research.
  6. Müller, Kai-Uwe & Steiner, Viktor, 2011. "Beschäftigungswirkungen von Lohnsubventionen und Mindestlöhnen - Zur Reform des Niedriglohnsektors in Deutschland," Discussion Papers 2011/4, Free University Berlin, School of Business & Economics.

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