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Minimum Wage Incidence: The Case for Germany

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  • Andreas Knabe
  • Ronnie Schöb

Abstract

This paper analyzes the impact of a statutory minimum wage on employment, wage inequality, public expenditures, and aggregate income in the low-wage sector for two scenarios: a competitive labor market and a monopsonistic labor market. Using data from the 2006 wave of the German Socio-Economic Panel (GSOEP), we show that irrespective of which scenario adequately describes the labor market, a statutory minimum wage reduces employment and raises public expenditures. While aggregate income in the low-wage sector increases, poor households (i.e., those eligible for Unemployment Benefits II), do not benefit from a minimum wage. Wage subsidies at the same fiscal cost ensure more favorable employment effects in both scenarios. However, the workers' income depends on whether we have a competitive or a monopsonistic labor market. A wage subsidy ensures higher household income in a competitive labor market but leads to lower income gains in the monopsonistic scenario. Furthermore, wage subsidies lead to a more equal income distribution than statutory minimum wages, irrespective of their incidence. Combining a minimum wage with a compensating wage subsidy, similar to the French minimum wage system, is extremely costly while still inferior to pure wage subsidies.

Suggested Citation

  • Andreas Knabe & Ronnie Schöb, 2009. "Minimum Wage Incidence: The Case for Germany," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(4), pages 403-441, December.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200912)65:4_403:mwitcf_2.0.tx_2-s
    DOI: 10.1628/001522108X486598
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Hanna Frings, 2013. "The Employment Effect of Industry-Specific, Collectively Bargained Minimum Wages," German Economic Review, Verein für Socialpolitik, vol. 14(3), pages 258-281, August.
    2. AndreasKnabe & ChristineLücke & RonnieSchöb & MarcelThum & LarsVandrei & MichaelWeber, 2014. "Regionale Beschäftigungseffekte des Mindestlohns im Freistaat Sachsen," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 21(05), pages 03-12, October.
    3. Müller, Kai-Uwe & Steiner, Viktor, 2011. "Beschäftigungswirkungen von Lohnsubventionen und Mindestlöhnen - Zur Reform des Niedriglohnsektors in Deutschland," Discussion Papers 2011/4, Free University Berlin, School of Business & Economics.
    4. Gürtzgen, Nicole & Blömer, Maximilian & Pohlan, Laura & Stichnoth, Holger & van den Berg, Gerard, 2016. "Estimating an Equilibrium Job Search Model for the German Labour Market," Annual Conference 2016 (Augsburg): Demographic Change 145950, Verein für Socialpolitik / German Economic Association.
    5. Knabe Andreas & Schöb Ronnie & Thum Marcel, 2014. "Der flächendeckende Mindestlohn," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 15(2), pages 133-157, June.
    6. George Economides & Thomas Moutos, 2014. "Minimum Wages as a Redistributive Device in the Long Run," CESifo Working Paper Series 5052, CESifo Group Munich.
    7. Michele Battisti & Gabriel Felbermayr, 2015. "Migranten im deutschen Arbeitsmarkt: Löhne, Arbeitslosigkeit, Erwerbsquoten," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 68(20), pages 39-47, October.
    8. Blömer, Maximilian J. & Guertzgen, Nicole & Pohlan, Laura & Stichnoth, Holger & van den Berg, Gerard J., 2018. "Unemployment effects of the German minimum wage in an equilibrium job search model," ZEW Discussion Papers 18-032, ZEW - Leibniz Centre for European Economic Research.

    More about this item

    Keywords

    minimum wage; monopsonistic labor market; wage subsidies;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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