Posted by on November 3, 2019 10:38 am
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“Four years statutory minimum wage – an overview of the most important research findings”

Courtesy of IAB


It was the most radical reform of the German labor market since Agenda 2010: the introduction of the statutory minimum wage in 2015. At that time, science and practice contradicted each other in partly diametrically opposed assessments of its effects. In the meantime, numerous empirically reliable data and studies have become available. The economist Oliver Bruttel, who manages the office of the multiparty and thus ideologically neutral minimum wage commission in Berlin, summarized the most important results in an English-language contribution to the Journal for Labor Market Research. Here are the most important things in brief:


In total, four million or 11.3 percent of all employees were affected by the introduction of the statutory minimum wage, because their wage level before the reform was still below the legal minimum wage of EUR 8.50 that came into force in 2015. At 20.7 percent, the percentage share in the East was much higher than in the West, at 9.3 percent.


The hourly wages for low earners have increased significantly thanks to minimum wages, but not monthly wages


Economists agree that their hourly wages have increased considerably thanks to the minimum wage. Between 2014 and 2016 – at the time when the minimum wage came into force – this growth for the affected employees was on average around 14 percent, according to a study by the German Institute for Economic Research commissioned by the Minimum Wage Commission. By comparison, between 1998 and 2014, their hourly pay increased on average by only 1 percent within two years. This especially benefited women, the low-skilled, employees of smaller companies and “mini-jobbers” – predominantly in the service sector.


However, the findings show that the higher hourly wages do not, or only to a limited extent, translate into higher monthly wages. One possible explanation, according to Bruttel, is that in many cases the introduction of the statutory minimum wage has led to a reduction in contractual working hours.


Minimum wage has barely reduced the number of “top-ups” and people below the poverty line


The number of Aufstocker, ie the employees who receive additional unemployment benefit II , was hardly reduced by the minimum wage boost. The statutory minimum wage was calculated at 8.50 euros per hour, so that for a single full-time employee no unemployment benefit II (commonly referred to as Hartz IV) needed. However many Hartz IV households also have children who continue to receive social benefits. In addition, the weekly working hours of Aufstockern are often low. Another reason is the high rents in the cities. Thus the statutory minimum wage is not a panacea against the risk of poverty, because only a small proportion of people at risk of poverty are in work and can therefore benefit from higher wages.


Slightly less mini jobs, but no major impact on employment subject to social security contributions


Numerous studies have addressed the question of how the minimum wage affects employment. Although the empirical evidence is inconsistent here, there is widespread agreement that the minimum wage lowers the number of mini-jobbers, who at most have a slight influence on the number of employees subject to social security contributions. Overall it appears less important that the studies evaluated by Bruttel differ in whether the latter effect is slightly positive or slightly negative or even statistically significant at all.


Reaction of the consequence for the enterprises: working time reduction, price increases and profit declines


Around 12 percent of companies had employees earning less than €8.50 before the introduction of the statutory minimum wage. In response to the minimum wage, these companies have frequently reduced the working hours of the employees concerned. In addition, prices have sometimes been increased without this having a significant impact on the macroeconomic price level. After all, the profit development of the companies concerned was worse than that of the non-affected companies. Overall, however, this has not led to an increase in business cancellations or insolvencies.


In his overview study, Bruttel points out that the minimum wage was introduced in a favorable overall economic environment. Whether the effects would have been different in a less favorable environment is therefore an open question, as are the longer-term effects of the minimum wage in view of increasing automation and digitization. Finally, research can only demonstrate the effects of the minimum wage to the extent that it is implemented by companies – but not the effects that would have occurred if all companies were law-abiding. The empirical data suggest, in the opinion of Bruttel, that the number of companies that circumvent the minimum wage can not be entirely neglected.