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Minimum Wages and their Alternatives: A Critical Assessment

  • Andreas Knabe
  • Ronnie Schöb

Do minimum wages reduce in-work-poverty and wage inequality? Or can alternative policies do better? We evaluate theses issues for the exemplary case of Germany that suffers from high unemployment among low-skilled workers and rising wage dispersion at the bottom of the wage distribution. We analyze the impact of three different policy options, currently discussed in Germany, on employment, wage inequality, public expenditures, and incomes of poor households: 1) a statutory minimum wage, 2) a combination of minimum wages and wage subsidies as e.g. in France and the Netherlands, and 3) pure wage subsidies to low-paid workers. We find that a minimum wage of EUR 7.50 would cost 840,000 low-paid jobs and increase the fiscal burden by about EUR 4 billion per year, while poor households’ income rises only by EUR 1.1 billion per year. With pure wage subsidies, the government can ensure more favorable employment and income effects. Combining a minimum wage with a wage subsidy turns out to be extremely costly and inferior to wage subsidies in all respects.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2494.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2494
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  1. Daron Acemoglu, 2000. "Technical Change, Inequality, and the Labor Market," NBER Working Papers 7800, National Bureau of Economic Research, Inc.
  2. Dustmann, Christian & Ludsteck, Johannes & Schönberg, Uta, 2007. "Revisiting the German Wage Structure," IZA Discussion Papers 2685, Institute for the Study of Labor (IZA).
  3. Andreas Knabe & Ronnie Schöb, 2007. "Subsidizing Extra Jobs: Promoting Employment by Taming the Unions," FEMM Working Papers 07020, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  4. Joachim Ragnitz & Marcel Thum, 2007. "The empirical relevance of minimum wages for the low-wage sector," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 8(2), pages 35-37, 07.
  5. Kramarz, Francis & Philippon, Thomas, 2000. "The Impact of Differential Payroll Tax Subsidies on Minimum Wage Employment," IZA Discussion Papers 219, Institute for the Study of Labor (IZA).
  6. Eswar Prasad, 2000. "The Unbearable Stability of the German Wage Structure; Evidence and Interpretation," IMF Working Papers 00/22, International Monetary Fund.
  7. Claus Schnabel & Joachim Wagner, 2008. "The Aging of the Unions in West Germany, 1980-2006," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 228(5+6), pages 497-511, December.
  8. Ive MARX, 2001. "Job subsidies and cuts in employers' social security contributions: The verdict of empirical evaluation studies," International Labour Review, International Labour Organization, vol. 140(1), pages 69-83, 03.
  9. Johannes Gernandt & Friedhelm Pfeiffer, 2007. "Rising Wage Inequality in Germany," SOEPpapers on Multidisciplinary Panel Data Research 14, DIW Berlin, The German Socio-Economic Panel (SOEP).
  10. Hans-Werner Sinn & Christian Holzner & Wolfgang Meister & Wolfgang Ochel & Martin Werding, 2007. "Die zentralen Elemente der Aktivierenden Sozialhilfe," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 60(04), pages 48-53, 02.
  11. Henri Sterdyniak, 2007. "Low-skilled Jobs: The French Strategy," Documents de Travail de l'OFCE 2007-15, Observatoire Francais des Conjonctures Economiques (OFCE).
  12. Guy Laroque & Bernard Salanie, 2002. "Labour market institutions and employment in France," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(1), pages 25-48.
  13. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP): Scope, Evolution and Enhancements," SOEPpapers on Multidisciplinary Panel Data Research 1, DIW Berlin, The German Socio-Economic Panel (SOEP).
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