Eat Your Cake and Have It Too? The Effect of the Minimum Wage on Employment and Family Income as Evidenced by Germany’s Federal Minimum Wage Implementation

Abstract

This paper analyzes the short-run effects of the minimum wage on employment and the family income distribution, in line with the first two questions posed by Stigler (1946). For this purpose, the thesis examined Germany’s recent implementation of a national minimum wage, expanding upon Caliendo et al. (2018). Regional variation in the policy’s bite—as well as the presence of a common trend in state employment levels, bite statistics, and the mean family income earned by the bottom 50% of the income distribution—led this study to follow Card’s (1992) and conduct a continuous difference-in-difference regression. Based on this paper’s regression results, the minimum wage appears to have a small and statistically significant negative effect on the level of overall employment. Furthermore, when separately analyzing the policy’s effect on regular and marginal employment, the findings indicate that the minimum wage has a larger negative effect on the latter category. Finally, this study’s estimates do not provide evidence that the implementation of Germany’s minimum wage led to the increase in family incomes along the lower half of the income distribution. Instead, there is some statistically significant evidence that the policy had a negative effect on the incomes earned by families located in the bottom 10 percent of the distribution. Based on these findings it appears that the minimum wage as a policy is not an effective tool to raise low-income families out of poverty.