Negative effects of minimum wage

The minimum wage has triggered measurable displacement effects in Germany. The fact that less volume of work was displaced than predicted was due to the circumvention of the minimum wage.

21.04.2020 · Economics, Social Sciences, Spatial Research · ifo Institute - Leibniz Institute for Economic Research at the University of Munich · News · Research result

Since its introduction in Germany, the minimum wage has triggered clearly measurable displacement effects. “In total, the minimum wage has led to a reduction of employment equivalent to 129,000 and 594,000 jobs,” write Marcel Thum, Director of the ifo Dresden branch, and coauthors in an essay for the ifo Schnelldienst.

“On the basis of the evaluation studies now available, it is fairly easy to estimate how much volume of work has been displaced by the minimum wage,” Thum explains. The decisive factor is the reduction in working hours. “When companies reduce the working hours of their employees, the total volume of work performed decreases,” the authors write. “In macroeconomic terms, this also constitutes a reduction in employment.”

The fact that less volume of work was displaced than predicted in forecasts was not least due to the circumvention of the minimum wage. “At the time, we had predicted losses of between 426,000 and 911,000 jobs, depending on the labor market model,” Thum explains. “In fact, the implementation of the minimum wage has so far been anything but comprehensive”. The data suggests that in 2016, only 47 percent of the wage increase that should have been observed as a result of the introduction of the minimum wage actually took place. “If this is taken into account, the predicted loss of employment would be a maximum of 534,000 jobs,” Thum says. “In this case, the maximum predicted loss of employment would even be slightly less than the established upper limit of 594,000 jobs.”

Moreover, the minimum wage did not lead to the hoped-for increase in income for low earners. “In the first year that the minimum wage was introduced, the reduction in working hours almost completely offset the hourly wage increases,” the authors write. “But even those minimum-wage earners who work to the same extent as before do not get much out of the minimum wage.”

Original publication

Balance after Five Years: What Has the Legal Minimum Wage Achieved? (German only)
Knabe, Andreas / Schöb, Ronnie / Thum, Marcel / Bruttel, Oliver / Börschlein, Benjamin / Bossler, Mario / Pakleppa, Felix / Bonin, Holger / Pestel, Nico / Fedorets, Alexandra / Caliendo, Marco
ifo Institut, München, 2020
ifo Schnelldienst, 2020, 73, Nr. 04, 03-28

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