Views divided over impact of statutory minimum wage

New research published by the Cologne Institute for Economic Research in October 2011 contradicts previous findings on the effects of a statutory minimum wage. The social partners are also divided on the issue. The United Services Union says a minimum wage of €8.50 would stop workers claiming public allowances to supplement their incomes, while the German Confederation of Employers’ Associations say it will lead to job losses and a greater drain on the public purse.

Background

During the spring and summer of 2011, the United Services Union (ver.di) called for the introduction of a minimum wage in Germany. Together with the Union of Food, Beverages, Tobacco, Hotel and Catering and Allied Workers (NGG), ver.di advocates a minimum wage of €8.50. Ver.di Chair Frank Bsirske pointed out in a press release (in German) that nearly one million people, including 400,000 full-time employees, had to supplement their low incomes with public allowances. NGG Chair Franz-Josef Möllenberg added that only a minimum wage could protect workers from a reduction in the standard of living.

However, Dieter Hundt, Chair of the German Confederation of Employers’ Associations (BDA), says the introduction of a statutory minimum wage would destroy jobs – a point he stressed in an interview (in German) on 1 October 2011 with daily newspaper Neue Osnabrücker Zeitung. He said this would mostly affect low-qualified workers and the long-term unemployed who often managed to get a foothold in the labour market with low-skilled, low-paid jobs. He stressed that the introduction of a statutory minimum wage would diminish these people’s chances of getting work, and no one could live on ‘a minimum wage that was not paid because the job did not exist anymore’.

Fiscal effects of a statutory minimum wage

The research and consultancy firm Prognos has analysed the possible consequences of the introduction of a statutory minimum wage. In its 2011 study (in German, 2.26Kb PDF) Prognos calculates that a minimum wage of €8.50 would lead to an increase of €14.5 million in the earned income of private households. This would lead to higher public revenues, estimated at €7.1 billion. However, the Cologne Institute for Economic Research (IW Köln) has come to a different conclusion with its new research results (in German, 324Kb PDF).

The IW research relies on a statistical simulation model which is used to analyse income distribution and to estimate the effects of income tax reforms, changes in the social security system or other public welfare benefits. It is based on the sample survey of income and expenditure (EVS) carried out by the Federal Statistical Office (destatis). EVS captures around 44,000 households. Assuming that a statutory minimum wage of €8.50 is introduced, the IW calculation considers not only the changes in the wage bill, but also the effects on public finances, including revenues from the business and income tax, social security budgets and the cost of earning replacement benefits and public benefits for job seekers and low-wage earners. Using data from 2009, the IW analysts develop three different scenarios for the fiscal effects of a statutory minimum wage.

  • Scenario 1: Assuming that a minimum wage of €8.50 was introduced and it had no negative impact on the German labour market (i.e. no jobs were lost); the government could save €5 billion as a result of higher revenues from the tax and social security systems.
  • Scenario 2: The introduction of a minimum wage is followed by job losses, mostly affecting marginal employees. In this case, the German government would be burdened by additional social costs of €0.8 billion, because the revenue from business tax would decline, fewer people would earn wages and pay social security contributions and more would claim social welfare benefits.
  • Scenario 3: If job losses also affect a greater number of full-time employees, the effects on the public budget would be aggravated and the government budget would have to shoulder additional expenditure of €6.6 billion.

Commentary

The IW analysis shows that the fiscal effects of a statutory minimum wage depend on the impact of such an instrument on the labour market. If a higher number of workers lost their jobs after a statutory minimum wage was established, it would place an additional burden on the public budget of between €0.8 billion – €6.6 billion. However, if no jobs were lost, the government could save €5 billion as a result of higher revenues from the tax and social security systems

Sandra Vogel, Cologne Institute for Economic Research (IW Köln)

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