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Price effects of minimum wages: Evidence from the construction sector in East and West Germany

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  • Werner, Thomas
  • Sell, Friedrich L.
  • Reinisch, David C.
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    Abstract

    In this paper, the authors present a new approach to estimate the impact of a minimum wage on the labor market of the construction sector in Germany. Instead of estimating the effect on employment, the authors focus on the change of prices on a firm level in order to differentiate between a competitive and a monopsonistic structured labor market. The composition of the sector-specific labor market serves again as a basis to evaluate whether the consequences of the minimum wage can be taken as economically advantageous or disadvantageous. Using firm data monthly conducted by the Ifo Institute for Economic Research, the estimations show that the minimum wage did have a different impact in East and West Germany. In East Germany, we find significant positive price effects of the minimum wage which exclude the possibility of positive employment effects due to monopsonistic structures. On the contrary, our results indicate a competitive sectorspecific labor market and declining employment. In contrast, there was no significant price reaction observed for West Germany. The minimum wage seems too low compared to the wages paid in the West German construction sector. Therefore, the introduction of the minimum wage cannot be assumed to be binding. --

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    Bibliographic Info

    Paper provided by Universität der Bundeswehr München, Economic Research Group in its series Working Papers in Economics with number 2013,4.

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    Date of creation: 2013
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    Handle: RePEc:zbw:ubwwpe:20134

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    Keywords: labor market; minimum wage; employment effects; construction industry; difference-in-differences;

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    1. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(3), pages 500-521, June.
    2. Card, David & Krueger, Alan B, 1994. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, American Economic Association, American Economic Association, vol. 84(4), pages 772-93, September.
    3. Christian Seiler, 2012. "The Data Sets of the LMU-ifo Economics & Business Data Center – A Guide for Researchers," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, Duncker & Humblot, Berlin, vol. 132(4), pages 609-618.
    4. William Wascher & David Neumark, 2000. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 90(5), pages 1362-1396, December.
    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. Joachim Ragnitz & Marcel Thum, 2008. "Beschäftigungswirkungen von Mindestlöhnen – eine Erläuterung zu den Berechnungen des ifo Instituts," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 61(01), pages 16-20, 01.
    7. Barr, Tavis & Roy, Udayan, 2008. "The effect of labor market monopsony on economic growth," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(4), pages 1446-1467, December.
    8. Daniel Aaronson & Eric French & James MacDonald, 2008. "The Minimum Wage, Restaurant Prices, and Labor Market Structure," Journal of Human Resources, University of Wisconsin Press, vol. 43(3), pages 688-720.
    9. Sara Lemos, 2004. "Anticipated Effects of the Minimum Wage on Prices," Discussion Papers in Economics, Department of Economics, University of Leicester 04/25, Department of Economics, University of Leicester.
    10. Marion König & Joachim Möller, 2009. "Impacts of minimum wages: a microdata analysis for the German construction sector," International Journal of Manpower, Emerald Group Publishing, Emerald Group Publishing, vol. 30(7), pages 716-741, November.
    11. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, Elsevier, vol. 80(1), pages 123-129, July.
    12. Lee, Chinkook & O'Roark, Brian, 1999. "The Impact of Minimum Wage Increases on Food and Kindred Products Prices: An Analysis of Price Pass-Through," Technical Bulletins, United States Department of Agriculture, Economic Research Service 33553, United States Department of Agriculture, Economic Research Service.
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