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

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  • Müller, Kai-Uwe

    ()
    (DIW Berlin)

  • Steiner, Viktor

    ()
    (Free University of Berlin)

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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 € 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 rather ineffective 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 means-tested income support.

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    Bibliographic Info

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3491.

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    Length: 35 pages
    Date of creation: May 2008
    Date of revision:
    Handle: RePEc:iza:izadps:dp3491

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    Related research

    Keywords: minimum wage; wage distribution; working poor; poverty reduction; micro-simulation;

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    References

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    1. Barry Bluestone & Teresa Ghilarducci, . "Making Work Pay, Wage Insurance for the Working Poor," Economics Public Policy Brief Archive ppb_28, Levy Economics Institute.
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    14. 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, vol. 49(3), pages 547-552, April.
    15. David Neumark & William Wascher, 2002. "Do Minimum Wages Fight Poverty?," Economic Inquiry, Western Economic Association International, vol. 40(3), pages 315-333, July.
    16. Sen, Amartya K, 1976. "Poverty: An Ordinal Approach to Measurement," Econometrica, Econometric Society, vol. 44(2), pages 219-31, March.
    17. Sutherland, H., 2001. "The National Minimum Wage and In-work Poverty," Cambridge Working Papers in Economics 0111, Faculty of Economics, University of Cambridge.
    18. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
    19. 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, vol. 73(1), pages 204-11, March.
    20. Kakwani, Nanak, 1980. "On a Class of Poverty Measures," Econometrica, Econometric Society, vol. 48(2), pages 437-46, March.
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