Does the German Minimum Wage Help Low Income Households?: Evidence from Observed Outcomes and the Simulation of Potential Effects

55 Pages Posted: 30 Jun 2019 Last revised: 18 Jul 2019

See all articles by Teresa Backhaus

Teresa Backhaus

WZB Berlin Social Science Center

Kai-Uwe Müller

German Institute for Economic Research (DIW Berlin)

Date Written: May 1, 2019

Abstract

Does the federal minimum wage in Germany introduced in 2015 improve the income situation of low income households and reduce in-work poverty? Previous literature on its distributional impact either focused on earnings and hourly wages (e.g. Caliendo et al., 2017), or is based on ex-ante simulations (e.g. Müller and Steiner, 2013). This paper provides systematic descriptive ex-post evidence on the distributional implications of the German minimum wage on wages and disposable household incomes. In contrast to most other studies, we define the group of affected by people’s relative position in the wage distribution in the respective year to account for the large fluctuations into and out of the bottom end of the wage distribution. As a benchmark for the full potential of the minimum wage, we simulate a full-compliance scenario and a scenario with a markedly higher minimum wage level.

Even though we find wage increases at the bottom of the wage distribution, the effects on wage inequality are limited because of non-compliance, difficulties in hourly wage measurement in certain occupations, and uneven wage growth across the distribution. Confirming previous simulation evidence the minimum wage proves to be an ineffective tool for the redistribution of disposable household incomes, as affected households do not concentrate at the bottom, but are spread across the entire income distribution with large shares in the middle. Overall inequality has even increased slightly as incomes of poorer households grew below average. Furthermore, we could not find a reduction in welfare dependence after the minimum wage introduction, even not for in-work transfers.

Keywords: minimum wage, wage distribution, income distribution

JEL Classification: J31, D31, J8

Suggested Citation

Backhaus, Teresa and Müller, Kai-Uwe, Does the German Minimum Wage Help Low Income Households?: Evidence from Observed Outcomes and the Simulation of Potential Effects (May 1, 2019). DIW Berlin Discussion Paper No. 1805 (2019). Available at SSRN: https://ssrn.com/abstract=3402360 or http://dx.doi.org/10.2139/ssrn.3402360

Teresa Backhaus

WZB Berlin Social Science Center ( email )

Reichpietschufer 50
D-10785 Berlin, 10785
Germany

Kai-Uwe Müller (Contact Author)

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

Mohrenstraße 58
Berlin, 10117
Germany

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