The influence of the German minimum wage on household incomes in Germany
Toralf Pusch, Institute of Economic and Social Research (WSI), Hans-Böckler-Foundation
In comparison to other European countries, Germany has one of the largest low-wage sectors (Deutscher Bundestag 2017). Currently, about 22% of employees work in the German low wage sector (Kalina / Weinkopf 2018). Against this background and the declining collective bargaining coverage since the 1990s, the minimum wage was introduced on 1 January 2015 after years of political discussion. Nonetheless, the minimum wage is a low wage. In the year 2019, too, the statutory minimum wage of € 9.23 remains below the low-wage threshold in Germany, which currently can be assumed to be between € 10.50 and € 11.00. In this respect, it is not surprising that there was hardly any decrease in low-paid employment as a result of the introduction of minimum wages (Kalina / Weinkopf 2018).
Although the statutory minimum wage in Germany probably did not lead to a lower prevalence of low-paid employment, this does not mean that the minimum wage had no distributional effects. Results for Germany so far have mainly considered hourly wages. Significant increases in hourly wages were found at the lower end of the wage distribution, although not all workers entitled to the minimum wage were yet able to reach it (Amlinger et al 2016, Burauel et al 2017, Pusch 2018). However, the distributional effects of the statutory minimum wage on monthly income and household income must be distinguished from its effects on hourly wages. Firstly, reductions in working hours dampened the impact of hourly wage increases on monthly wages (Caliendo et al. 2017b). In addition, even rising monthly wages cannot be directly linked to rising household incomes, for example if the introduction of minimum wages has lead to job losses. In addition, the tax and levy system (for example, decreasing social incomes) in the case of rising monthly wages may cause household incomes to rise less then monthly wages (OECD 2015, p.50, Manning 2013, Dube 2017).
Currently, there is no comprehensive study on the effects of the statutory minimum wage on household incomes in Germany. Noteworthy are the results of Bruckmeier and Becker (2018) who found a slight decline in the risk of poverty among employees in sectors with a high minimum wage incidence, especially in eastern Germany. However, the measured effects are not robust across all specifications and not always significant. Related to the question of the effect of the minimum wage on the risk of poverty is the question of the effect of the minimum wage on the number of “Aufstocker”, which earned a low wage income in addition to the remuneration Hartz IV benefits. While Bruckmeier and Becker (2018) found hardly any effects, Schmitz (2017) could find slight reduction in the number of posts due to the minimum wage. On the other hand, income losses may be incurred on the entrepreneurs affected by the introduction of minimum wages - especially the self-employed with few employees (Döhrn 2014). Descriptive findings (Mindestlohnkommission 2018) and causal investigations (Bossler and Hohendanner 2016, Bossler et al., 2018) do not indicate a relevant effect of the minimum wage for the number of self-employed persons. However, Bossler et al. (2018) found a negative impact on the profit situation in the firms affected by the minimum wage.
While the influence of the statutory minimum wage on the distribution of household incomes in Germany has so far not been studied extensively, international literature offers more results. Part of international research focuses on the impact of minimum wages on risk of poverty, with mostly minor effects being shown (Belman and Wolfson 2014, Dube 2017, Neumark and Wascher 2008, Card and Krueger 1995, Manning 2013). However, distinguishing the question of the impact of minimum wages on the risk of poverty is the effect of minimum wages on the general distribution of household incomes. As stated by the OECD (2015, p. 49), many minimum-wage recipients do not live in poor households. A clearly positive effect of minimum wages on household incomes has been shown for the US in a recent study by Dube (2017). In addition, Dube (2017) cites 13 other studies for the US that show predominantly positive elasticities of poverty risk and / or household incomes with respect to minimum wage variations (e.g., Card and Krueger 1995, Addison and Blackburn 1999). Neumark et al. (2005) is the only contribution that marks a poverty-increasing effect of minimum wages. There are also indications for the UK of positive effects of minimum wages on household incomes (Cribb et al., 2018, ch. 6, Sutherland 2001). Similar to Germany, the effect of income increases linked to the minimum wage is dampened by the tax and levy system also in the UK (Brewer and De Agostini 2017, Brewer et al., 2009).
To test minimum wage effects on household incomes, Difference in Difference (DiD) estimates of household income are conducted for the years 2015…2017 using the PASS database supplied by IAB. For the estimations, two measures of relative minimum wage impact are being used in the sense of a robustness check. The first one is the regional depth of intervention of the minimum wage (state level). The second is the distance of the individual hourly wage from the minimum wage before its introduction. Spillover effects are checked in the latter specification and the control group is delineated accordingly. Other control variables, such as regional trends in economic development, are also added. In order to test the impact of the minimum wage on self-employment income, approximate estimates are made with measures of minimum wage impact on smaller holdings in the IAB Establishment Panel. The presentation of the causally interpretable effects is supplemented by descriptive findings and developments.
