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Would a Legal Minimum Wage Reduce Poverty? A Microsimulation Study for Germany

  • Müller, Kai-Uwe

    ()

    (DIW Berlin)

  • Steiner, Viktor

    ()

    (Free University of Berlin)

Registered author(s):

    In view of rising wage inequality and increasing poverty, the introduction of a legal minimum wage has recently become an important policy issue in Germany. We analyze the distributional effects of the introduction of a nationwide legal minimum wage of € 7.5 per hour on the basis of a microsimulation model which accounts for the complex interactions between individual wages, the tax-benefit system and net household incomes. Simulation results show that the minimum wage would be rather ineffective in reducing poverty, even if it led to a substantial increase in hourly wages at the bottom of the wage distribution and had no negative employment effects. The ineffectiveness of a minimum wage in Germany is mainly due to the existing system of means-tested income support.

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    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3491.

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    Length: 35 pages
    Date of creation: May 2008
    Date of revision:
    Handle: RePEc:iza:izadps:dp3491
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    1. Marcel Thum & Joachim Ragnitz, 2007. "Zur Einführung von Mindestlöhnen: Empirische Relevanz des Niedriglohnsektors," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 60(10), pages 33-35, 05.
    2. Barry Bluestone & Teresa Ghilarducci, . "Making Work Pay, Wage Insurance for the Working Poor," Economics Public Policy Brief Archive ppb_28, Levy Economics Institute.
    3. David Neumark & William Wascher, 2006. "Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research," NBER Working Papers 12663, National Bureau of Economic Research, Inc.
    4. Neumark, David & Wascher, William, 2001. "Using The EITC to Help Poor Families: New Evidence and a Comparison with the Minimum Wage," National Tax Journal, National Tax Association, vol. 54(n. 2), pages 281-318, June.
    5. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
    6. Hendrik Schmitz & Viktor Steiner, 2007. "Benefit-Entitlement Effects and the Duration of Unemployment: An Ex-ante Evaluation of Recent Labour Market Reforms in Germany," Discussion Papers of DIW Berlin 678, DIW Berlin, German Institute for Economic Research.
    7. Hilke Almut Kayser & Joachim R. Frick, 2000. "Take It or Leave It: (Non-) Take-up Behavior of Social Assistance in Germany," Discussion Papers of DIW Berlin 210, DIW Berlin, German Institute for Economic Research.
    8. Richard V. Burkhauser & Kenneth A. Couch & David C. Wittenburg, 1996. "Who gets what from minimum wage hikes: A re-estimation of Card and Krueger's distributional analysis in "Myth and Measurement: The New Economics of the Minimum Wage."," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 49(3), pages 547-552, April.
    9. Kakwani, Nanak, 1980. "On a Class of Poverty Measures," Econometrica, Econometric Society, vol. 48(2), pages 437-46, March.
    10. Atkinson, A B, 1987. "On the Measurement of Poverty," Econometrica, Econometric Society, vol. 55(4), pages 749-64, July.
    11. Neumark, David, 2008. "Alternative Labor Market Policies to Increase Economic Self-Sufficiency: Mandating Higher Wages, Subsidizing Employment, and Raising Productivity," IZA Discussion Papers 3355, Institute for the Study of Labor (IZA).
    12. Riphahn, Regina T., 2000. "Rational Poverty or Poor Rationality? The Take-up of Social Assistance Benefits," IZA Discussion Papers 124, Institute for the Study of Labor (IZA).
    13. Immervoll, Herwig, 2007. "Minimum Wages, Minimum Labour Costs and the Tax Treatment of Low-Wage Employment," IZA Discussion Papers 2555, Institute for the Study of Labor (IZA).
    14. David Neumark & William Wascher, 1997. "Do Minimum Wages Fight Poverty?," NBER Working Papers 6127, National Bureau of Economic Research, Inc.
    15. Johnson, William R & Browning, Edgar K, 1983. "The Distributional and Efficiency Effects of Increasing the Minimum Wage: A Simulation," American Economic Review, American Economic Association, vol. 73(1), pages 204-11, March.
    16. Sen, Amartya K, 1976. "Poverty: An Ordinal Approach to Measurement," Econometrica, Econometric Society, vol. 44(2), pages 219-31, March.
    17. Amanda Gosling, 1996. "Minimum wages: possible effects on the distribution of income," Fiscal Studies, Institute for Fiscal Studies, vol. 17(4), pages 31-48, November.
    18. Marco Caliendo & Viktor Steiner, 2005. "Aktive Arbeitsmarktpolitik in Deutschland: Bestandsaufnahme und Bewertung der mikroökonomischen Evaluationsergebnisse," Discussion Papers of DIW Berlin 515, DIW Berlin, German Institute for Economic Research.
    19. Karl Brenke, 2006. "Wachsender Niedriglohnsektor in Deutschland: sind Mindestlöhne sinnvoll?," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 73(15/16), pages 197-206.
    20. Sutherland, H., 2001. "The National Minimum Wage and In-work Poverty," Cambridge Working Papers in Economics 0111, Faculty of Economics, University of Cambridge.
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