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Would a Legal Minimum Wage Reduce Poverty?: A Microsimulation Study for Germany

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  • Kai-Uwe Müller
  • Viktor Steiner
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    Abstract

    In view of rising wage inequality and increasing poverty, the introduction of a legal minimum wage has recently become an important policy issue in Germany. We analyze the distributional effects of the introduction of a nationwide legal minimum wage of EUR 7.5 per hour on the basis of a microsimulation model which accounts for the complex interactions between individual wages, the tax-benefit system and net household incomes. Simulation results show that the minimum wage would be ratherineffective in reducing poverty, even if it led to a substantial increase in hourly wages at the bottom of the wage distribution and had no negative employment effects. The ineffectiveness of a minimum wage in Germany is mainly due to the existing system of meanstested income support.

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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.83403.de/dp791.pdf
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    Bibliographic Info

    Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 791.

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    Length: 32 p.
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:diw:diwwpp:dp791

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    Keywords: minimum wage; wage distribution; working poor; poverty reduction; microsimulation;

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    1. Sen, Amartya K, 1976. "Poverty: An Ordinal Approach to Measurement," Econometrica, Econometric Society, Econometric Society, vol. 44(2), pages 219-31, March.
    2. Atkinson, A B, 1987. "On the Measurement of Poverty," Econometrica, Econometric Society, Econometric Society, vol. 55(4), pages 749-64, July.
    3. David Neumark & William Wascher, 2000. "Using the EITC to Help Poor Families: New Evidence and a Comparision with the Minimum Wage," NBER Working Papers 7599, National Bureau of Economic Research, Inc.
    4. Barry Bluestone & Teresa Ghilarducci, . "Making Work Pay, Wage Insurance for the Working Poor," Economics Public Policy Brief Archive, Levy Economics Institute ppb_28, Levy Economics Institute.
    5. Hilke Almut Kayser & Joachim R. Frick, 2000. "Take It or Leave It: (Non-) Take-up Behavior of Social Assistance in Germany," Discussion Papers of DIW Berlin 210, DIW Berlin, German Institute for Economic Research.
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    7. Johnson, William R & Browning, Edgar K, 1983. "The Distributional and Efficiency Effects of Increasing the Minimum Wage: A Simulation," American Economic Review, American Economic Association, American Economic Association, vol. 73(1), pages 204-11, March.
    8. Hendrik Schmitz & Viktor Steiner, 2007. "Benefit-Entitlement Effects and the Duration of Unemployment: An Ex-ante Evaluation of Recent Labour Market Reforms in Germany," Discussion Papers of DIW Berlin 678, DIW Berlin, German Institute for Economic Research.
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    10. David Neumark & William Wascher, 2006. "Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research," NBER Working Papers 12663, National Bureau of Economic Research, Inc.
    11. David Neumark & William Wascher, 1997. "Do Minimum Wages Fight Poverty?," NBER Working Papers 6127, National Bureau of Economic Research, Inc.
    12. Marcel Thum & Joachim Ragnitz, 2007. "Zur Einführung von Mindestlöhnen: Empirische Relevanz des Niedriglohnsektors," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 60(10), pages 33-35, 05.
    13. Immervoll, Herwig, 2007. "Minimum Wages, Minimum Labour Costs and the Tax Treatment of Low-Wage Employment," IZA Discussion Papers 2555, Institute for the Study of Labor (IZA).
    14. Sutherland, H., 2001. "The National Minimum Wage and In-work Poverty," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0111, Faculty of Economics, University of Cambridge.
    15. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, Econometric Society, vol. 52(3), pages 761-66, May.
    16. Richard V. Burkhauser & Kenneth A. Couch & David C. Wittenburg, 1996. "Who gets what from minimum wage hikes: A re-estimation of Card and Krueger's distributional analysis in "Myth and Measurement: The New Economics of the Minimum Wage."," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, ILR Review, Cornell University, ILR School, vol. 49(3), pages 547-552, April.
    17. Kakwani, Nanak, 1980. "On a Class of Poverty Measures," Econometrica, Econometric Society, Econometric Society, vol. 48(2), pages 437-46, March.
    18. Neumark, David, 2008. "Alternative Labor Market Policies to Increase Economic Self-Sufficiency: Mandating Higher Wages, Subsidizing Employment, and Raising Productivity," IZA Discussion Papers 3355, Institute for the Study of Labor (IZA).
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