ifo Viewpoint No. 181: The Minimum Wage: Time to Take Stock

But what are its implications for employment? It is often argued that the minimum wage has had no negative impact on employment at all. According to this view the warnings issued by many economists were a false alarm. It is true that employment levels have continued to develop positively in Germany even after the introduction of the minimum wage. The working population rose from 42.7 million in 2014 to 43 million in 2015. The only decline was seen in the number of persons employed in the so-called mini-jobs, with a maximum monthly income of 450 Euros and reduced social insurance contributions, which fell by around 90,000. However, such positions were partly replaced by regular jobs. But the increase in overall employment does not mean that the minimum wage did not cost any jobs.

To establish whether job losses were sustained, actual labour market developments would have to be compared with developments in the absence of a minimum wage, which cannot be observed. It is nevertheless possible to estimate the effects of the minimum wage by comparing developments in areas of the German economy that were heavily impacted by the minimum wage to those in areas that were less affected. One can, for instance, compare labour market regions with low wages, which were more heavily affected by the minimum wage, with high-wage regions like the Munich area in which the minimum wage is less relevant. In fact, employment trends are no weaker in those regions more heavily affected by the introduction of the minimum wage than in less affected regions. The result is different, though, if one considers individual companies and looks at whether more heavily affected employers recruited fewer new staff. This approach suggests that the minimum wage cost around 60,000 new jobs in 2015. It reveals that only a few companies reacted to the minimum wage by dismissing staff; they created fewer new jobs instead. It is therefore not appropriate to argue that there were no job losses at all due to the minimum wage. However, its impact, to date at least, has been limited.

If companies have hardly made any job cuts, how have they reacted to the minimum wage? In surveys around a quarter of companies report increasing their selling prices or are planning to do so. This reaction is particularly pronounced in the taxi industry, where 70 percent of employees earned less than the minimum wage in 2014. Taxi ride prices have risen by a good twelve percent in Germany as a whole, and by almost 20 percent in eastern Germany. Other branches are passing on additional costs to their customers too. There have also been other adjustments: around 14 percent of companies are scaling back their investments and outsourcing part of their production. The work intensification strategy, whereby companies shorten working hours and demand a higher level of work intensity, has also proven popular, with 22 percent of employers adopting this strategy.

These adjustments show that the minimum wage does come at a price. Job losses have been very limited to date, but whether this will be the case in the next economic downturn remains to be seen. One thing is clear: Germany can only integrate the large number of immigrants into its labour market if wage costs do not rise too quickly.

Ultimately, the future impact of the minimum wage will depend heavily on whether increases are made cautiously and take the labour market situation into consideration, or whether politicians engage in one-upmanship. Some political parties are already calling for an increase in the minimum wage to twelve euros per hour. If the minimum wage level becomes a key election campaign topic, Germany’s employment miracle may soon be over.