Can the German minimum wage alleviate poverty and income inequality? Evidence from observed data and simulated counterfactuals

Abstract

This study provides ex-post evidence on the redistributive impact of the minimum
wage on disposable household incomes in Germany. Although the reduction
of income inequality and poverty were emphasized as policy goals of the of minimum
wage introduction, the distributional literature for Germany has focused
on hourly wages and earnings or relied on ex-ante simulations. Since ‘natural’
control groups are not available due to a nationwide introduction, this paper accumulates
descriptive evidence. Based on data from the German Socio-Economic
Panel we analyze changes in wage and income inequality, poverty, and different
mechanisms that affect transmission from individual gross wage-rates to disposable
household incomes. The minimum wage is found to be an ineffective tool
for income redistribution. Increases at the bottom of the wage distribution do not
translate into increases in disposable incomes of poor households because individuals
affected by the minimum wage do not live primarily in households at the
bottom, but are spread across the income distribution. Thus, welfare dependence
is only marginally reduced. Additional simulations show that neither full compliance,
nor substantial increases of the level would make the minimum wage more
effective in reducing inequality and poverty.

Keywords: minimum wage, wage distribution, income distribution

JEL Classification: J31, D31, J8