Labor Market and Income Effects of a Legal Minimum Wage in Germany

42 Pages Posted: 10 May 2010

See all articles by Kai-Uwe Müller

Kai-Uwe Müller

German Institute for Economic Research (DIW Berlin)

Viktor Steiner

Zentrum Fuer Europaeische Wirtschaftsforschung (ZEW) - Center for European Economic Research; IZA Institute of Labor Economics

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Abstract

In view of rising wage and income inequality, the introduction of a legal minimum wage has recently become an important policy issue in Germany. We analyze the distributional effects of a nationwide legal minimum wage of 7.50 € 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, also taking into account potential employment effects as well as indirect effects on consumption. Simulation results show that the minimum wage would be rather ineffective in raising net household incomes and reducing income inequality, even if it led to a substantial increase in hourly wages at the bottom of the wage distribution. The ineffectiveness of a minimum wage in Germany is mainly due to the existing system of means-tested income support and the position of minimum wage earners in the income distribution.

Keywords: minimum wage, wage distribution, employment effects, income distribution, inequality, microsimulation

JEL Classification: I32, H31, J32

Suggested Citation

Müller, Kai-Uwe and Steiner, Viktor, Labor Market and Income Effects of a Legal Minimum Wage in Germany. IZA Discussion Paper No. 4929. Available at SSRN: https://ssrn.com/abstract=1603378

Kai-Uwe Müller (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Viktor Steiner

Zentrum Fuer Europaeische Wirtschaftsforschung (ZEW) - Center for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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