Introducing minimum wages in Germany employment effects in a post Keynesian perspective
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Introducing minimum wages in Germany employment effects in a post Keynesian perspective Arne Heise 1 & Toralf Pusch 2 # Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract The long ongoing discussion about the employment impact of minimum wages was recently reinvigorated with the introduction of an economy-wide, binding minimum wage in Germany in 2015. In the traditional line of reasoning, based on the allocational approach of modern labor market economics, it has been suggested that the impact is clearly negative on the assumption of a competitive labor market and clearly positive on the assumption of a monopsonistic labor market. Unfortunately, both predictions conflict with the empirical findings, which do not show a clear-cut impact of significant size in either direction. As an alternative, a Post Keynesian two-sector model including an employment market is presented here. Its most likely prediction of a negligible employment effect and a sectoral shift is tested against the German case of an introduction of a statutory minimum wage in 2015. Despite substantial wage increases in the low wage sector, our empirical analysis reveals very low overall employment loss, amounting to about 26,500 workers, as a result of a small sectoral shift from low wage industries to higher wage industries. Keywords Post Keynesianism . Minimum wage . Aggregate demand . Aggregate supply JEL codes B 50 . E 12 . E 23 . J 31
1 Introduction The discussion about minimum wages in general is an old one.1 The introduction of a statutory minimum wage in Germany in 2015 added yet another chapter to that discussion.2 While the economic mainstream view – represented by the majority position within the German Council of Economic Experts (Sachverständigenrat) – 1
For an overview, see Neumark et al. (2014).
2
See e.g. Heitger (2003), Franz (2007), Bauer et al. (2009), Paloyo et al. (2013).
* Arne Heise [email protected] Extended author information available on the last page of the article
A. Heise, T. Pusch
claimed that minimum wages create a negative employment effect, particularly for lower-skilled and youth, inexperienced workers (see SVR 2013: 284ff.), progressive or dissenting economists – represented by the minority position within the German Council of Economic Experts – argue that a minimum wage will actually increase the quantity of employment (see SVR 2013: 289 f., Bofinger 2015: 164ff.). Both positions are based on a partial analysis of the labor market using allocational reasoning. Assuming the ordinary labor market to be characterized by perfect competition – as put forward in a number of introductory textbooks – a minimum wage will undoubtedly have significantly negative employment effects once the minimum wage is higher than the market-clearing wage rate associated with the respective skill level.3 This is because any job that does not earn its labor cost, i.e. where the (minimum) wage rate is higher than the marginal productivity of that job, will eventually be priced out of the market. A minim
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