Minimum Wage Incidence: The Case for Germany

41 Pages Posted: 31 Oct 2008

See all articles by Andreas Knabe

Andreas Knabe

Otto-von-Guericke-Universität Magdeburg - Institute of Economics and Business Administration; CESifo (Center for Economic Studies and Ifo Institute)

Ronnie Schöb

Freie Universitaet Berlin; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 1, 2008

Abstract

Using data from the 2006 wave of the German Socio-Economic Panel (GSOEP), this paper analyzes how a minimum wage affects employment, wage inequality, public expenditures, and aggregate income in the low-wage sector. It is shown that a statutory minimum wage of EUR 7.50 per hour would cost 840,000 low-paid jobs and increases the fiscal burden by about EUR 4 billion per year, while household income rises only by EUR 1.1 billion per year. Poor households, i.e. those eligible for Unemployment Benefits II, do not benefit from a minimum wage at all. Comparing the effects of a minimum wage with different types of wage subsidies that require the same additional public expenditures, the government can ensure more favorable employment - depending on the subsidies' incidence - and income effects. Wage subsidies also allow a more equal income distribution than statutory minimum wages. Combining a minimum wage with a wage subsidy, similar to the French minimum wage system, is extremely costly while such a policy is inferior to wage subsidies in all respects.

Keywords: minimum wage incidence, statutory minimum wage, welfare system, wage subsidies

JEL Classification: H2, I3, J3

Suggested Citation

Knabe, Andreas and Schöb, Ronnie, Minimum Wage Incidence: The Case for Germany (October 1, 2008). CESifo Working Paper Series No. 2432. Available at SSRN: https://ssrn.com/abstract=1291098

Andreas Knabe

Otto-von-Guericke-Universität Magdeburg - Institute of Economics and Business Administration ( email )

Universitaetsplatz 2
Magdeburg, 39016
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Ronnie Schöb (Contact Author)

Freie Universitaet Berlin ( email )

Boltzmannstraße 20
Berlin, Berlin 14195
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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