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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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    Cited by:

    1. Frings Hanna, 2013. "The Employment Effect of Industry- Specific, Collectively Bargained Minimum Wages," German Economic Review, De Gruyter, vol. 14(3), pages 258-281, August.
    2. Kragl, Jenny & Schöttner, Anja, 2011. "Wage Floors and Optimal Job Design," VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48731, Verein für Socialpolitik / German Economic Association.
    3. Koch, Andreas & Kirchmann, Andrea & Reiner, Marcel & Scheu, Tobias & Boockmann, Bernhard & Bonin, Holger, 2018. "Verhaltensmuster von Betrieben und Beschäftigten im Zuge der Einführung des gesetzlichen Mindestlohns," IZA Research Reports 84, Institute of Labor Economics (IZA).
    4. Müller, Kai-Uwe & Steiner, Viktor, 2010. "Labor Market and Income Effects of a Legal Minimum Wage in Germany," IZA Discussion Papers 4929, Institute of Labor Economics (IZA).
    5. Andreas Knabe & Christine Lücke & Ronnie Schöb & Marcel Thum & Lars Vandrei & Michael Weber, 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.
    6. Adolf STROOMBERGEN & Peter HALL, 2010. "General Equilibrium Analysis of Bio-Energy Options," EcoMod2010 259600160, EcoMod.
    7. George Economides & Thomas Moutos, 2014. "Minimum Wages, Capital Accumulation and Worker's Incomes," CESifo Working Paper Series 4821, CESifo.
    8. Knabe Andreas & Schöb Ronnie & Thum Marcel, 2014. "Der flächendeckende Mindestlohn," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 15(2), pages 133-157, June.
    9. Schmitz, Sebastian, 2017. "The effects of Germany's new minimum wage on employment and welfare dependency," Discussion Papers 2017/21, Free University Berlin, School of Business & Economics.
    10. 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.
    11. Paulina Broniatowska & Aleksandra Majchrowska & Zbigniew ¯ó³kiewski, 2015. "Does minimum wage reduce youth employment on regional labour markets in Poland?," Lodz Economics Working Papers 1/2015, University of Lodz, Faculty of Economics and Sociology.
    12. Müller, Kai-Uwe & Steiner, Viktor, 2013. "Distributional effects of a minimum wage in a welfare state: The case of Germany," Discussion Papers 2013/21, Free University Berlin, School of Business & Economics.
    13. Robert C. M. Beyer, 2017. "The Performance of Immigrants in the German Labor Market," SOEPpapers on Multidisciplinary Panel Data Research 892, DIW Berlin, The German Socio-Economic Panel (SOEP).
    14. Kai-Uwe Müller, 2010. "Employment Effects of a Sectoral Minimum Wage in Germany: Semi-Parametric Estimations from Cross-Sectional Data," Discussion Papers of DIW Berlin 1061, DIW Berlin, German Institute for Economic Research.
    15. Mueller, Kai-Uwe & Steiner, Viktor, 2013. "Behavioral effects of a federal minimum wage and income inequality in Germany," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79784, Verein für Socialpolitik / German Economic Association.
    16. Gürtzgen, Nicole & Blömer, Maximilian & Pohlan, Laura & Stichnoth, Holger & van den Berg, Gerard, 2016. "Estimating an Equilibrium Job Search Model for the German Labour Market," VfS Annual Conference 2016 (Augsburg): Demographic Change 145950, Verein für Socialpolitik / German Economic Association.
    17. Bredemeier, Christian & Juessen, Falko, 2012. "Minimum Wages and Female Labor Supply in Germany," IZA Discussion Papers 6892, Institute of Labor Economics (IZA).
    18. Schmid, Ramona, 2022. "Mind the gap: Effects of the national minimum wage on the gender wage gap in Germany," Hohenheim Discussion Papers in Business, Economics and Social Sciences 06-2022, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    19. 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.
    20. Kai-Uwe Müller & Viktor Steiner, 2013. "Distributional Effects of a Minimum Wage in a Welfare State: The Case of Germany," SOEPpapers on Multidisciplinary Panel Data Research 617, DIW Berlin, The German Socio-Economic Panel (SOEP).
    21. George Economides & Thomas Moutos, 2014. "Minimum Wages as a Redistributive Device in the Long Run," CESifo Working Paper Series 5052, CESifo.
    22. Müller, Kai-Uwe, 2012. "Estimating the employment effects of a minimum wage from a cross-sectional wage distribution. A semi-parametric approach," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62019, Verein für Socialpolitik / German Economic Association.
    23. Gebhard Kirchgässner, 2009. "Critical Analysis of Some Well-Intended Proposals to Fight Unemployment," University of St. Gallen Department of Economics working paper series 2009 2009-17, Department of Economics, University of St. Gallen.
    24. Kuddo, Arvo, 2009. "Labor laws in Eastern European and Central Asian countries : minimum norms and practices," Social Protection Discussion Papers and Notes 51698, The World Bank.
    25. 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.

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    More about this item

    Keywords

    minimum wage; monopsonistic labor market; wage subsidies;
    All these keywords.

    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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