German minimum wage did not lead to job losses

Our study suggests that employers could afford paying higher wages to low-wage earners.
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The introduction of a uniform national minimum wage for the first time in Germany in 2015 did not lead to an increase in unemployment, new research from the London School of Economics and Political Science (LSE) has found.

The study, published as a Centre for Economic Policy Research (CEPR) discussion paper, is the first of its kind to study the wider implications of Germany’s minimum wage policy on pay and regional migration.

The researchers concluded fears of increased unemployment and internal migration are likely to be unfounded, as workers’ wages were likely to have been below the market rate, as companies absorbed the higher cost of labour without making redundancies.

In January 2015 the federal minimum wage was introduced in Germany, Europe’s largest economy, across all 16 of the countries federal states. As a result of the law, German employers were required to pay workers at least €8.50 per hour, or 48% of the median salary of full‐time workers.

German regions have vastly differing levels of productivity and salary, for example, workers in Bavaria in Germany’s south west typically enjoy higher average wages than workers in the Mecklenburg, which neighbours Poland in Germany’s north east.

The minimum wage policy therefore had a greater impact on pay in Germany’s poorer regions, where many workers earn less than the 48% of the median salary, and a relatively smaller effect on wages in the richer areas, where fewer workers earn less than the minimum.

Some economists predicted that because of the relatively high level of Germany’s minimum wage, regions with lower wages would experience an economic shock which would lead to increases in unemployment, as organisations sought to reduce their wage bill. It was also assumed that outward migration from the region would rise, as unemployed citizens sought work in other parts of Germany.

To identify the effects across the regions, the researchers analysed employment levels in Germany from 2011 to 2016. They found that in regions where wages were low, the minimum wage was introduced without changes to employment levels. In fact, unemployment fell in many areas with relatively lower wages for a period in 2015.

In their study, the authors suggest the steady levels of employment in Germany’s low-wage regions mean workers were being underpaid, as organisational revenues were transferred to workers rather than being retained by their employers through redundancies that would reduce their overall wage bill. The German experience challenges labour market theory where supply and demand for labour ensures wages are set correctly according to worker’s productivity.

 Dr Gabriel Ahlfeldt, Associate Professor of Urban Economics and Land Development of the Department of Geography and Environment, said: “The fact that we observe policy-enforced increases in wages without job losses implies that workers were paid below their marginal product. This is not consistent with the standard labour economics model and suggests that employers could afford paying higher wages to low-wage earners.

 “Overall, the policy, so far, appears to have led to some reduction in inequalities across individuals and regions. It does not seem to have caused unemployment or outmigration in the economically weaker regions in the east, a fear that might explain why Germany was a late adopter of such a policy.”

Behind the article

The regional effects of Germany's national minimum wage by Gabriel Ahlfeldt, Duncan Roth, Tobias Seidel was published by The Centre for Economic Policy Research (DP13005) on June 20, 2018.