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Minimum Wage Incidence: The Case for Germany

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  • Andreas Knabe
  • Ronnie Schöb

Abstract

Using data from the 2006 wave of the German Socio-Economic Panel (GSOEP), this paper analyzes how a minimum wage affects employment, wage inequality, public expenditures, and aggregate income in the low-wage sector. It is shown that a statutory minimum wage of EUR 7.50 per hour would cost 840,000 low-paid jobs and increases the fiscal burden by aboutEUR 4 billion per year, while household income rises only by EUR 1.1 billion per year. Poor households, i.e. those eligible for Unemployment Benefits II, do not benefit from a minimum wage at all. Comparing the effects of a minimum wage with different types of wage subsidiesthat require the same additional public expenditures, the government can ensure more favorable employment – depending on the subsidies’ incidence – and income effects. Wage subsidies also allow a more equal income distribution than statutory minimum wages. Combining a minimum wage with a wage subsidy, similar to the French minimum wage system, is extremely costly while such a policy is inferior to wage subsidies in all respects.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2432.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2432

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Keywords: minimum wage incidence; statutory minimum wage; welfare system; wagesubsidies;

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References

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  1. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP): Scope, Evolution and Enhancements," SOEPpapers on Multidisciplinary Panel Data Research 1, DIW Berlin, The German Socio-Economic Panel (SOEP).
  2. Johannes Gernandt & Friedhelm Pfeiffer, 2007. "Rising Wage Inequality in Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 227(4), pages 358-380, August.
  3. Gerhard D. Kleinhenz & Stefan Bauernschuster, 2008. "Staatlicher Mindestlohn – Musterfall eines Mangels an Aufklärung über die Ökonomik sozialer Politik," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 61(06), pages 45-49, 03.
  4. Neumark, David & Wascher, William L., 2007. "Minimum Wages and Employment," Foundations and Trends(R) in Microeconomics, now publishers, now publishers, vol. 3(1–2), pages 1-182, March.
  5. Hans-Werner Sinn & Christian Holzner & Wolfgang Meister & Wolfgang Ochel & Martin Werding, 2006. "Aktivierende Sozialhilfe 2006 - das Kombilohn-Modell des ifo Instituts," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 59(02), pages 06-27, 01.
  6. Francis Kramarz & Thomas Philippon, 2000. "The Impact of Differenctial Payroll Tax Subsidies on Minimum Wage Employment," Working Papers, Centre de Recherche en Economie et Statistique 2000-10, Centre de Recherche en Economie et Statistique.
  7. Blinder, Alan S, 1988. "The Challenge of High Unemployment," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 1-15, May.
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  9. Hamermesh, Daniel S, 1980. "Factor Market Dynamics and the Incidence of Taxes and Subsidies," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 95(4), pages 751-64, December.
  10. Eswar S. Prasad, 2004. "The Unbearable Stability of the German Wage Structure: Evidence and Interpretation," IMF Staff Papers, Palgrave Macmillan, vol. 51(2), pages 354-385.
  11. Andreas Knabe & Ronnie Schöb & Joachim Weimann, 2006. "Marginal Employment Subsidization: A New Concept and a Reappraisal," CESifo Working Paper Series 1707, CESifo Group Munich.
  12. Joachim Ragnitz & Marcel Thum, 2007. "The empirical relevance of minimum wages for the low-wage sector," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 8(2), pages 35-37, 07.
  13. Wolfgang Franz, 2007. "Ein zielgerichtetes Kombilohnmodell: Der Vorschlag des Sachverständigenrats," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 60(04), pages 24-28, 02.
  14. Guy Laroque & Bernard Salanie, 2002. "Labour market institutions and employment in France," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 17(1), pages 25-48.
  15. Hans-Werner Sinn & Christian Holzner & Wolfgang Meister & Wolfgang Ochel & Martin Werding, 2007. "Die zentralen Elemente der Aktivierenden Sozialhilfe," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 60(04), pages 48-53, 02.
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Cited by:
  1. 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).
  2. 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.
  3. Bredemeier, Christian & Juessen, Falko, 2012. "Minimum Wages and Female Labor Supply in Germany," IZA Discussion Papers 6892, Institute for the Study of Labor (IZA).
  4. 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.
  5. 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, Verein für Socialpolitik / German Economic Association 62019, Verein für Socialpolitik / German Economic Association.
  6. Kuddo, Arvo, 2009. "Labor laws in Eastern European and Central Asian countries : minimum norms and practices," Social Protection Discussion Papers 51698, The World Bank.

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