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Behavioral effects of a federal minimum wage and income inequality in Germany

  • Mueller, Kai-Uwe
  • Steiner, Viktor
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    Empirical studies on minimum wages are primarily concerned with employment while their effects on income inequality receive less attention. Yet, a popular argument for a federal minimum wage in Germany is that it will prevent in-work poverty and reduce income inequality. We examine this assertion for different minimum wage levels on the basis of a microsimulation model that accounts for the interactions between wages, the tax-benefit system and net incomes at the household level. The methodological approach of an earlier study is extended by incorporating behavioral adjustments at different margins (labor supply and demand, consumption) for the first time into a microsimulation framework at the household level. We use data from the SOEP, the IABS, and the Continuous Household Budget Survey. We show that even a high federal minimum wage will only have a minor impact on inequality among households with at least one minimum-wage worker. Low wage earners are not not concentrated in the lower parts but rather scattered over the income distribution. Wage increases often substitute welfare transfers and are subject to high marginal tax rates. A decline in labor demand could diminish the gains in net incomes up to 50% and higher product prices further reduce these gains even after consumption adjusts. Although it might decrease wage inequality substantially, the distributive impact of a minimum wage on disposable incomes is thus very limited.

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    File URL: http://econstor.eu/bitstream/10419/79784/1/VfS_2013_pid_744.pdf
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    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79784.

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    Date of creation: 2013
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    Handle: RePEc:zbw:vfsc13:79784
    Contact details of provider: Web page: http://www.socialpolitik.org/
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    1. Thomas K. Bauer & Jochen Kluve & Sandra Schaffner & Christoph M. Schmidt, 2009. "Fiscal Effects of Minimum Wages: An Analysis for Germany," German Economic Review, Verein für Socialpolitik, vol. 10, pages 224-242, 05.
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    3. David H. Autor & Alan Manning & Christopher L. Smith, 2010. "The Contribution of the Minimum Wage to U.S. Wage Inequality over Three Decades: A Reassessment," CEP Discussion Papers dp1025, Centre for Economic Performance, LSE.
    4. Dinardo, J. & Fortin, N.M. & Lemieux, T., 1994. "Labor Market Institutions and the Distribution of Wages, 1973-1992: a Semiparametric Approach," Cahiers de recherche 9406, Universite de Montreal, Departement de sciences economiques.
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    19. Viktor Steiner & Katharina Wrohlich & Peter Haan & Johannes Geyer, 2012. "Documentation of the Tax-Benefit Microsimulation Model STSM: Version 2012," Data Documentation 63, DIW Berlin, German Institute for Economic Research.
    20. Joachim Ragnitz & Marcel Thum, 2008. "Beschäftigungswirkungen von Mindestlöhnen – eine Erläuterung zu den Berechnungen des ifo Instituts," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 61(01), pages 16-20, 01.
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