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Minimum-Wage Study: Nationwide Minimum Wage of 8.50 Euros in Germany Not Effective

Researchers at Freie Universität Berlin and German Institute for Economic Research Consider Positive Effects to Be Overestimated

№ 336/2013 from Nov 04, 2013

According to a study done by researchers at Freie Universität Berlin and the German Institute for Economic Research (DIW Berlin), the introduction of a nationwide minimum wage of 8.50 euros currently being discussed in the coalition negotiations in Germany, would not have the positive effects on household income of low-income earners expected by proponents of the measure. The study’s authors, Viktor Steiner of Freie Universität Berlin and Kai-Uwe Müller of DIW Berlin, calculated that the hourly wages of almost 13 percent of those currently employed would increase by an average of slightly more than 40 percent. Even without taking into account the expected adjustments in the level of employment and the prices of consumer goods, which are expected to increase due to the minimum wage, the average disposable household incomes of all the households in Germany would only increase by about 900 euros per year. If the negative employment effects, estimated by the researchers to be about 500,000 persons, and the expected price increases are taken into account, the average disposable income falls slightly. The study also shows that the minimum wage does not seem to be an effective policy instrument for income distribution in welfare states like Germany. According to the economists’ analysis, a minimum wage of 8.50 euros would not be well targeted at low income households, and it would only have negligible effects on income inequality.

According to the researchers, one reason for the modest increases in net household income of low-wage earners is that they often live in households where the minimum-wage income is only a small part of the total household income. Another factor is the German system of means-tested income support whereby families with low incomes receive additional benefits from the unemployment office. An increase in earnings of low-wage workers induced by the minimum wage would mean that they would receive less in income-related social transfers. When the negative employment effects of the minimum wage are also taken into account in the study, the average increase in net household incomes drops to barely 400 euros per year. The researchers calculated that the negative employment effects would affect nearly 500,000 individuals. Nearly half of the estimated reduction in employment would affect workers in the eastern part of Germany where skilled workers would be hit relatively hard. In the western part of Germany the job losses would disproportionately affect women in part-time employment. In addition, the higher labor cost would be associated with price increases and lower demand for goods. If the impact of the introduction of a minimum wage on the prices of goods is taken into account, it would actually be associated with a decline in real household income by an average of almost one percent.

Link to the Study

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