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Minimum Wage Incidence: The Case for Germany

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This paper analyzes the impact of a statutory minimum wage on employment, wage inequality, public expenditures, and aggregate income in the low-wage sector for two scenarios: a competitive labor market and a monopsonistic labor market. Using data from the 2006 wave of the German Socio-Economic Panel (GSOEP), we show that irrespective of which scenario adequately describes the labor market, a statutory minimum wage reduces employment and raises public expenditures. While aggregate income in the low-wage sector increases, poor households (i.e., those eligible for Unemployment Benefits II), do not benefit from a minimum wage. Wage subsidies at the same fiscal cost ensure more favorable employment effects in both scenarios. However, the workers' income depends on whether we have a competitive or a monopsonistic labor market. A wage subsidy ensures higher household income in a competitive labor market but leads to lower income gains in the monopsonistic scenario. Furthermore, wage subsidies lead to a more equal income distribution than statutory minimum wages, irrespective of their incidence. Combining a minimum wage with a compensating wage subsidy, similar to the French minimum wage system, is extremely costly while still inferior to pure wage subsidies.
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Keywords: MINIMUM WAGE; MONOPSONISTIC LABOR MARKET; WAGE SUBSIDIES

Document Type: Research Article

Publication date: December 1, 2009

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  • As one of the world's oldest professional journals in public finance, founded in 1884, FinanzArchiv (FA) publishes original work from all fields of public economics which are of interest to an international readership, e.g. taxation, public debt, public goods, public choice, federalism, market failure, social policy, and the welfare state. Special emphasis is on high-quality theoretical and empirical papers on current policy issues.

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    FA is listed in the Social Science Citation Index (SSCI), in Current Contents/Social and Behavioral Sciences, in Econ Lit, in the Journal of Economic Literature, in IDEAS and RePEc and in the International Bibliography of the Social Sciences.

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