Germany’s Minimum Wage: Employment, Wage and Reallocation Effects

Over the past two decades, Germany has witnessed an unprecedented increase in wage inequality, in particular at the lower end of the wage distribution. Between 1995 and 2012, wages at the 10th percentile declined in real terms by 8%, whereas median wages remained roughly constant and wages at the 85th percentile increased by 13%. Over the same time period, collective bargaining, covering more than 90% of workers in the early 1990s, has eroded, now covering no more than 45% of workers. Against this backdrop, the German government introduced in January 2015, for the first time in its history, a nationwide minimum wage of €8.50 per hour, which is roughly at the 15th percentile of the 2013 wage distribution. There is a heated and ongoing debate among academics and policy makers alike whether this policy will raise the living standards of the working poor, or whether it will instead harm exactly those workers it is supposed to help, by destroying their jobs. The goal of our proposed research is to shed light on this debate by carefully evaluating the impact of the introduction of the national minimum wage on employment, wages and wage inequality, firm entry and exit, and the reallocation of workers from low to high productivity firms. To guide the empirical analysis, we will develop a general theoretical framework that, in contrast to existing models of the labour market studying minimum wage effects, combines heterogeneous firms producing differentiated products with heterogeneous workers and bargaining. Our empirical analysis will be based on a new data product developed by one of the project applicants —an up-to-date monthly panel on the employment and unemployment status of all individuals covered by the social security system, combined with information on individual wages and hours worked from the IAB Employment History (BEH) database. For identification, we will exploit variation in the “bite” of the minimum wage (i.e., the share of workers earning a wage below €8.50 one or two years prior to the introduction of the minimum wage) across regions and firms, and adopt a difference-in-difference strategy in combination with an event study approach. Our novel conceptual and empirical contributions will significantly improve our understanding of the channels through which the minimum wage impacts on the labour market. As such, our proposed research will provide important new insights to the minimum wage debate not only in Germany, but also in other countries.   

Prof. Uta Schönberg, PhD (University College London)
Dr. Philipp vom Berge (IAB)