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Minimum Wage Incidence: The Case for Germany

  • Andreas Knabe
  • Ronnie Schöb

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.

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Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 65 (2009)
Issue (Month): 4 (December)
Pages: 403-441

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200912)65:4_403:mwitcf_2.0.tx_2-s
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