Behavioral effects of a federal minimum wage and income inequality in Germany

Empirical studies on minimum wages are primarily concerned with employment while their effects on income inequality receive less attention. Yet, a popular argument for a federal minimum wage in Germany is that it will prevent in-work poverty and reduce income inequality. We examine this assertion for different minimum wage levels on the basis of a microsimulation model that accounts for the interactions between wages, the tax-benefit system and net incomes at the household level. The methodological approach of an earlier study is extended by incorporating behavioral adjustments at different margins (labor supply and demand, consumption) for the first time into a microsimulation framework at the household level. We use data from the SOEP, the IABS, and the Continuous Household Budget Survey. We show that even a high federal minimum wage will only have a minor impact on inequality among households with at least one minimum-wage worker. Low wage earners are not not concentrated in the lower parts but rather scattered over the income distribution. Wage increases often substitute welfare transfers and are subject to high marginal tax rates. A decline in labor demand could diminish the gains in net incomes up to 50% and higher product prices further reduce these gains even after consumption adjusts. Although it might decrease wage inequality substantially, the distributive impact of a minimum wage on disposable incomes is thus very limited.