Germany is one of the few OECD countries where no general legal minimum wage currently exists (see Immervoll, 2007). However, in view of rising wage inequality, the introduction of a legal minimum wage has become an important policy issue in Germany. One argument for the introduction of a minimum wage is that the existing wage bargaining system no longer prevents ‘excessive’ downward wage flexibility. This is said to be related to the significant decline of union coverage in the economy and an expanding low wage sector partly as a result of recent labor market reforms in Germany.
In this regard, a minimum wage prevents ‘unfair’ competition as a result of wage subsidies aimed at increasing employment in the low-wage sector. Another argument is that earnings of people working full-time should be sufficient to cover at least the means-tested social minimum. In that respect, a minimum wage is a means to prevent the emergence of the so-called ‘working poor’.
Whereas the extensive literature on the economic effects of minimum wages primarily focuses on their wage and employment effects (see, e.g., Brown, 1999; Neumark and Wascher, 2007), there has been comparatively little research on the important policy question to what extent minimum wages affect the available income at the household level and thus the income distribution and inequality. This literature, which mostly deals with the U.S., has shown that only a small fraction of families at the bottom of the income distribution includes workers that are employed at the minimum. Low income households often do not work at all or have only a single wage earner with the spouse caring for children. Therefore, a change of minimum wages is only weakly or not at all related to household income and has no significant effect on income inequality. In order to comprehensively analyze the potential income effects of minimum wages, the composition of households, the interplay of minimum wages and the tax-benefit system, as well as the adjustment of labor supply and demand have to be taken into account.
For Germany, there are hitherto only a few explorative studies on the potential effects of a statutory minimum wage on the wage and income distribution. On the basis of data from the German Socio-Economic Panel Study (SOEP), DIW (2006) documents that in West Germany very low wages are concentrated among marginally employed persons working few hours in jobs exempted from social security contributions (so-called ‘Mini jobs’), whereas in East Germany low-wage jobs are also common among regularly employed people. It is also shown that minimum wages would disproportionately affect employees working in small firms and certain sectors, in particular agriculture and services.
The relationship between lower wages and low incomes is found to be rather weak since low wages contribute only a relatively small share to household incomes. Bosch and Weinkopf (2006) report similar results for full-time employed people on the basis of administrative employment register data. Using SOEP data for 2004, Kalina and Weinkopf (2007) show that about 14 % of all dependent employed persons would have received a hypothetical minimum wage of 7.50 € in Germany, with higher shares among unskilled workers, women, youth, and people in marginal employment. Also using SOEP data, Knabe and Schöb (2008) find that households eligible to means-tested unemployment benefits would, on average, not benefit from a minimum wage because of the high benefit withdrawal rate implicit in the German social welfare system. A legal minimum wage of 7.50 € per hour has been suggested, inter alia, by the governing Social Democratic Party and the trade unions.
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