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Distributional Effects of a Minimum Wage in a Welfare State: The Case of Germany

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  • Kai-Uwe Müller
  • Viktor Steiner

Abstract

A popular argument for a federal minimum wage is that it will prevent in-work poverty and reduce income inequality. We examine this assertion for Germany, a welfare state with a relative generous means-tested social minimum and high marginal tax rates. Our analysis is based on a microsimulation model that accounts for the interactions between wages, the tax-benefit system and net incomes at the household level as well as employment and price effects on the distribution of incomes induced by the introduction of a minimum wage. We show that the impact of even a relatively high federal minimum wage on disposable incomes is small because low wage earners are scattered over the whole income distribution and wage increases would to a large extent be offset by reductions in means-tested welfare transfers and high marginal tax rates. Taking into account negative employment effects and increases in consumer prices induced by the minimum wage would wipe out any positive direct effects on net incomes of households affected by the minimum wage.

Suggested Citation

  • Kai-Uwe Müller & Viktor Steiner, 2013. "Distributional Effects of a Minimum Wage in a Welfare State: The Case of Germany," SOEPpapers on Multidisciplinary Panel Data Research 617, DIW Berlin, The German Socio-Economic Panel (SOEP).
    • Handle: RePEc:diw:diwsop:diw_sp617
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    References listed on IDEAS

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    Cited by:

    1. Martin Popp, 2023. "How elastic is labor demand? A meta-analysis for the German labor market," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 57(1), pages 1-21, December.
    2. Sebastian Link, 2019. "The Price and Employment Response of Firms to the Introduction of Minimum Wages," CESifo Working Paper Series 7575, CESifo.
    3. Caliendo, Marco & Fedorets, Alexandra & Preuss, Malte & Schröder, Carsten & Wittbrodt, Linda, 2018. "The short-run employment effects of the German minimum wage reform," Labour Economics, Elsevier, vol. 53(C), pages 46-62.
    4. Richard V. Burkhauser & Kevin Corinth, 2021. "The minimum wage versus the earned income tax credit for reducing poverty," IZA World of Labor, Institute of Labor Economics (IZA), pages 153-153, September.
    5. Carsten Schröder, 2014. "Kosten und Nutzen von Mindestlöhnen," DIW Roundup: Politik im Fokus 22, DIW Berlin, German Institute for Economic Research.
    6. Ademmer, Martin & Boysen-Hogrefe, Jens & Groll, Dominik & Jannsen, Nils & Kooths, Stefan & Meuchelböck, Saskia & Sonnenberg, Nils, 2022. "Deutsche Wirtschaft im Frühjahr 2022. Erholung gefährdet - Preisdruck hoch [German Economy Spring 2022. Recovery at risk - Soaring Inflation]," Kieler Konjunkturberichte 89, Kiel Institute for the World Economy (IfW Kiel).
    7. Heise, Arne, 2018. "Reconciling Facts with Fiction, or: A Theoretical Speculation of why the Minimum Wage has no Discernible Effect on Employment," MPRA Paper 92483, University Library of Munich, Germany.
    8. Caliendo Marco & Wittbrodt Linda & Schröder Carsten, 2019. "The Causal Effects of the Minimum Wage Introduction in Germany – An Overview," German Economic Review, De Gruyter, vol. 20(3), pages 257-292, August.
    9. Schmid, Ramona, 2022. "Mind the gap: Effects of the national minimum wage on the gender wage gap in Germany," Hohenheim Discussion Papers in Business, Economics and Social Sciences 06-2022, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    10. Schmid, Ramona, 2023. "Mind the Gap: Effects of the National Minimum Wage on the Gender Wage Gap in Germany," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277646, Verein für Socialpolitik / German Economic Association.
    11. George Economides & Thomas Moutos, 2017. "Minimum Wages in the Presence of In-Kind Redistribution," CESifo Working Paper Series 6545, CESifo.
    12. Antje Schubert & Johannes Steinbrecher & Marcel Thum & Michael Weber, 2016. "The Impact of the Statutory Minimum Wage Act in Saxony," ifo Dresden Studien, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 77, May.
    13. Bofinger, Peter & Buch, Claudia M. & Feld, Lars P. & Schmidt, Christoph M. & Wieland, Volker, 2013. "Gegen eine rückwärtsgewandte Wirtschaftspolitik. Jahresgutachten 2013/14 [Against a backward-looking economic policy. Annual Report 2013/14]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201314.
    14. Arni, Patrick & Eichhorst, Werner & Pestel, Nico & Spermann, Alexander & Zimmermann, Klaus F., 2014. "Kein Mindestlohn ohne unabhängige wissenschaftliche Evaluation," IZA Standpunkte 65, Institute of Labor Economics (IZA).
    15. Backhaus, Teresa & Müller, Kai-Uwe, 2019. "Does the German minimum wage benefit low income households?," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203585, Verein für Socialpolitik / German Economic Association.
    16. Grünberger Klaus & Narazani Edlira & Filauro Stefano & Kiss Áron, 2022. "Social and fiscal impacts of statutory minimum wages in EU countries: a microsimulation analysis with EUROMOD," IZA Journal of Labor Policy, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 12(1), pages 1-39, January.
    17. Mario Bossler & Martin Popp, 2022. "Labor Demand on a Tight Leash," Papers 2203.05593, arXiv.org, revised Feb 2024.
    18. Antje Schubert & Michael Weber, 2016. "Der flächendeckende Mindestlohn in Sachsen: Hohe Reichweite, vielfältige Reaktionen derBetriebe," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 23(03), pages 05-11, June.
    19. Popp, Martin, 2023. "How elastic is labor demand? A meta-analysis for the German labor market," Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 57, pages 1-14.
    20. Schmidt, Torsten & Barabas, György & Benner, Niklas & Dirks, Maximilian & Isaak, Niklas & Jessen, Robin & Schacht, Philip & Steuernagel, Anne, 2022. "Die wirtschaftliche Entwicklung im Inland: Gestiegene Energiepreise belasten die Erholung," RWI Konjunkturberichte, RWI - Leibniz-Institut für Wirtschaftsforschung, vol. 73(1), pages 39-78.
    21. Teresa Backhaus & Kai-Uwe Müller, 2019. "Does the German Minimum Wage Help Low Income Households?: Evidence from Observed Outcomes and the Simulation of Potential Effects," Discussion Papers of DIW Berlin 1805, DIW Berlin, German Institute for Economic Research.
    22. Groll, Dominik, 2022. "Zur Mindestlohnerhöhung auf 12 Euro," Kiel Insight 2022.04, Kiel Institute for the World Economy (IfW Kiel).
    23. Boll, Christina & Hüning, Hendrik & Leppin, Julian & Puckelwald, Johannes, 2015. "Potenzielle Auswirkungen des Mindestlohnes auf den Gender Pay Gap in Deutschland: Eine Simulationsstudie," HWWI Policy Papers 89, Hamburg Institute of International Economics (HWWI).
    24. Boll, Christina & Hüning, Hendrik & Leppin, Julian & Puckelwald, Johannes, 2015. "Potential effects of a statutory minimum wage on the gender pay gap: A simulation-based study for Germany," HWWI Research Papers 163, Hamburg Institute of International Economics (HWWI).

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    More about this item

    Keywords

    minimum wage; employment effects; income distribution; inequality; microsimulation;
    All these keywords.

    JEL classification:

    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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