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Labor Market and Income Effects of a Legal Minimum Wage in 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 and income inequality, the introduction of a legal minimum wage has recently become an important policy issue in Germany. We analyze the distributional effects of a nationwide legal minimum wage of 7.50 € 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, also taking into account potential employment effects as well as indirect effects on consumption. Simulation results show that the minimum wage would be rather ineffective in raising net household incomes and reducing income inequality, even if it led to a substantial increase in hourly wages at the bottom of the wage distribution. The ineffectiveness of a minimum wage in Germany is mainly due to the existing system of means-tested income support and the position of minimum wage earners in the income distribution.

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    Bibliographic Info

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4929.

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    Length: 42 pages
    Date of creation: May 2010
    Date of revision:
    Handle: RePEc:iza:izadps:dp4929

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    Related research

    Keywords: minimum wage; wage distribution; employment effects; income distribution; inequality; microsimulation;

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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, Levy Economics Institute ppb_28, Levy Economics Institute.
    2. 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.
    3. Andreas Knabe & Ronnie Schöb, 2008. "Minimum Wage Incidence: The Case for Germany," CESifo Working Paper Series 2432, CESifo Group Munich.
    4. Amanda Gosling, 1996. "Minimum wages: possible effects on the distribution of income," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 17(4), pages 31-48, November.
    5. Viktor Steiner & Katharina Wrohlich, 2005. "Work Incentives and Labor Supply Effects of the ‘Mini-Jobs Reform’ in Germany," Empirica, Springer, Springer, vol. 32(1), pages 91-116, 03.
    6. Peter Haan & Viktor Steiner, 2006. "Making Work Pay for the Elderly Unemployed: Evaluating Alternative Policy Reforms for Germany," Discussion Papers of DIW Berlin 641, DIW Berlin, German Institute for Economic Research.
    7. 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).
    8. 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.
    9. Viktor Steiner & Katharina Wrohlich & Peter Haan & Johannes Geyer, 2008. "Documentation of the Tax-Benefit Microsimulation Model STSM: Version 2008," Data Documentation, DIW Berlin, German Institute for Economic Research 31, DIW Berlin, German Institute for Economic Research.
    10. 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.
    11. Arthur van Soest, 1995. "Structural Models of Family Labor Supply: A Discrete Choice Approach," Journal of Human Resources, University of Wisconsin Press, vol. 30(1), pages 63-88.
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