The effects of the legal minimum wage in Germany

Term Paper, 2020

32 Pages, Grade: 1,3


Table of contents

List of Illustrations

List of Tables

List of abbreviations

1. Introduction

2 Economic theories
2.1 Competitive Market Model
2.2 Monopsony and Minimum Wage

3 Basics of minimum wages
3.1 Definition of the minimum wage
3.2 Types of minimum wages
3.3 Target of the minimum wage
3.4 Minimum wages in a European and international context

4 Starting point and general conditions in Germany
4.1 Introduction of the minimum wage
4.2 Scope of the legal minimum wage
4.3 Economic conditions
4.4 Highly affected industries by the minimum wage

5 Effects of the minimum wage on employment
5.1 Total employment
5.2 Employees subject to social security contributions
5.3 Only marginal employment
5.4 Unemployment and vacancies
5.5 Top-Ups and risk of poverty

6. Discussion

7. Outlook


List of Illustrations

Figure 1: Supply and demand curve

Figure 2: Minimum wage in Europe €/h

Figure 3: Minimum wage worldwide €/h

Figure 4: Total employment - IAB establishment panel

Figure 5: Total Employment in Germany in k

Figure 6: Employees subject to social security contributions

Figure 7: Only marginal employment development

Figure 8: Full- time top- ups with SGBII benefits in k€

Figure 9: How many Big Macs can workers buy per hour?

Figure 10: How long does a worker have to work for one Big Mac?

Figure 11: Measures taken by companies in response to the minimum wage

Figure 12: Average paid working hours in employment relationships in the minimum wage range (hours per week)

Figure 13: Contractually agreed and actual weekly working hours including overtime (hours per week)

Figure 14: Reluctance to take on new employees and layoffs

List of Tables

Table 1: Highly affected industries from the minimum wage

Table 2: Total employment, persons subject to social security contributions and only marginally employed

Table 3: Price development of highly effected industries from the minimum wage

List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

„Minimum wage is the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract”.1 The government uses the minimum wage as a basic price control, which can force companies to create equal pay for all employees regardless of their origin, gender or belief. Currently, 90 percent of countries have regulations or binding tariff regulations that determine the minimum wage. In countries such as Sweden, Finland, Denmark, Switzerland, Austria and Italy there is no legal minimum wage. There, the government leaves the employer associations and unions to set a minimum wage in collective bargaining. New Zealand was the first country to introduce the minimum wage in 1894, and 192 more followed until 2019. Many of these countries have very complex systems, for example India has more than 1200 different minimum wage rates.2

Hardly any other labour market policy measure has been discussed as extensively as the introduction of the minimum wage of EUR 8.50 gross per hour on January 1, 2015 in Germany. For the supporters it was a long overdue step to offer low-wage earners a higher wage and thus a better standard of living. However, economists warned in advance that introducing minimum wages would only have negative consequences, especially when it comes to employment. Various studies have predicted that it could result in the loss of thousands of jobs.3 For example, the Ifo Institute in Munich forecasted a threat to up to 900 thousand jobs.4 Opponents of the minimum wage also pointed out that low-skilled workers would find it difficult to get into employment and would make little contribution to fighting poverty.5

The aim of this paper is to analyse how the market in Germany reacted to the introduction of the minimum wage. Also the history and structure of the minimum wage is described and the different economic theories are compared.

2. Economic theories

The minimum wage has a huge impact on employment and is one of the most controversial but probably the best researched topics in economics. Different models predict that the introduction of the minimum wage in a perfect and competitive labour market will lead to a reduction in employment. However, if it is assumed that the labour market is monopsonistic, the introduction of the minimum wage can increase or decrease employment depending on the situation. Therefore, it cannot be predicted with certainty whether the introduction of a legal minimum wage will have the same effect on employment in all sectors and all company sizes.6

2.1 Competitive Market Model

The competitive market model or supply and demand model evaluates resources based on supply and demand. Consumers buy these resources at the market price to maximise their happiness, and producers own the resources and maximise their benefits through sales or rentals. The law of demand defines that the higher the price of a product or service, the less customers are willing to buy it. The demand for high-priced products is often so low because the opportunity cost of purchasing the product rises in parallel with the price. Customers refrain from buying the goods or services if they are therefore unable to buy goods or services that are more important to them.7 The supply is the amount of goods or services that manufacturers want or can sell at a certain price.8

Abbildung in dieser Leseprobe nicht enthalten

At the point where the supply function and the demand function intersect, the economy is in balance. At this point, the goods' allocation is most efficient because the quantity of goods produced exactly matches the quantities requested at this price. Anyone who wants to buy or sell at this equilibrium price will find customers or manufacturers that make it possible.9 10 If there is no minimum wage, wages will adjust, both upwards and downwards, until there is a balance between the demanded and the offered amount of work.

If the price set by the manufacturer is higher than what the customer is willing to pay for it, he will not be able to sell the quantity produced, which will lead to an excess supply. However, if the price is below the equilibrium price, the quantity demanded is higher than the quantity provided and there is an excess of demand. This knowledge can be transferred to the labour market, where the demand for work is opposed to the job offer. If you then take wages as the price on the labour market, the wage elasticity of demand reflects the price elasticity of the labour market.

In a perfect market, the equilibrium wage would result in the number of possible employees being as high as the number of jobs in the company and there would be no unemployment. In such a case, the introduction of a minimum wage can lead to wages exceeding the equilibrium price.11 As a result, companies need less workers than are available on the market, which in turn leads to unemployment.

The classic economists take the view that the supply creates its own demand. The government's actions are limited to ensuring market functions. This means that government measures to promote the economy are limited to the promotion of companies. The Keynesian theory, on the other hand, recommends promoting the supply side, since, as the global economic crisis has shown, demand always stimulates supply. Unfortunately, however, one of these two basic positions are seldomly found in the current guidelines of states and countries.12

2.2 Monopsony and Minimum Wage

„A monopsony is a market condition in which there is only one buyer, the monopsonist. Like a monopoly, a monopsony also has imperfect market conditions. The difference between a monopoly and monopsony is primarily in the difference between the controlling entities. A single buyer dominates a monopsonized market while an individual seller controls a monopolised market. Monopsonists are common to areas where they supply most or all of the region's jobs.“13 Because of their unique position, monopsonies have a wealth of power. This can be triggered by regional structures, for example, if a large company is the only employer in a more rural area and can therefore have a major impact on the price of the labour factor. Insufficient mobility of workers - this can be both financial and psychological - can lead to a wage cut that does not result in the employee leaving the company immediately.14 If there is a monopson, companies continue to act as price takers on the goods market, but no longer choose the optimal employment on the labour market at a given exogenous wage rate, but instead as “sole customer” a profit-maximising combination of wages and employment.15 The monopson model can reverse the predicted negative employment effect of an increase in the minimum wage. Indeed, a slight increase in the minimum wage will cause employers to increase their employment, as a higher minimum wage will allow former low-wage workers to fill their vacancies quickly. The minimum wage forces these companies to behave more like a high-wage company with lower vacancies and lower fluctuation rates. If the minimum wage is raised too much, companies will of course choose to cut employment compared to the conventional model.16 In a monopson, in which a company with market power on the demand side pays lower wages and employment falls below the equilibrium level, a minimum wage can indeed increase both the wage level and the number of employees. In such a case, a minimum wage can bring social benefits.17 The monopson model has only a theoretical approach. In earlier times without transport infrastructure and with reduced mobility, a monopson could be a realistic situation. Today, people can travel long distances to work and have a wider choice of potential employers. This point is encouraged by increasing globalisation and trade liberalisation. This has led to increased competition and labour markets. The modern economy suggests that a moderate minimum wage could increase employment since the labour markets are monopsonistic and workers have no bargaining power.

3. Basics of minimum wages

3.1 Definition of the minimum wage

The minimum wage is defined by the state by law or by collective bargaining parties as a fixed wage that employees are entitled to as a minimum to ensure their livelihood, a so-called lower wage limit. It can refer either to an hourly wage rate or to the monthly income with full employment.18

3.2 Types of minimum wages

There are three different types of minimum wages: national, regional and industry­specific minimum wages. Here again, a legal distinction is made according to the legal, collectively regulated or generally binding minimum wages. National minimum wages are mostly regulated by law and apply to the entire country. Regional minimum wages are not widespread. Although there is a national minimum wage in the USA, the individual states can also set a regional minimum wage, which may not be lower than the national minimum. Industry-specific minimum wages are the results of collective bargaining. This minimum wage has been agreed in a tariff and reflects the minimum wage in the respective branch and must also not fall below the legal minimum wage.19

3.3 Target of the minimum wage

The introduction of a legal minimum wage generally has two main objectives:

1. Protection of workers from exploitation by employers.
2. Fighting poverty despite paid work (working poor) and ensuring an adequate standard of living and securing a livelihood.20

The coalition agreement dated August 11, 2014 clearly defined the goals for Germany. On the other hand, they want full-time workers to have a sufficient income to ensure their livelihood without jeopardizing employment.21

3.4 Minimum wages in a European and international context

A total of 22 of the 27 Member States of the European Union (EU) have introduced a national minimum wage. Only in the countries of Austria, Italy, Cyprus, Denmark and in the Scandinavian countries Sweden and Finland there is no national minimum wage, but only minimum wages, which are determined by collective agreements.22 The level of minimum wages differs considerably between countries within the EU. The lowest minimum wage in the EU is EUR 1.72 per hour in Bulgaria, the highest in Luxembourg at EUR 11.97 per hour.23

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Minimum wage in Europe €/h (As of January 1, 2019)24

Abbildung in dieser Leseprobe nicht enthalten

Figure 3: Minimum wage worldwide €/h (As of January 1, 2019)25 Taking into account the cost of living in the European countries, large differences are also found when converting the minimum wages into purchasing power standards (PPS). Converted into PPS, the European minimum wage is between 3.42 PPS in Latvia to 9.18 PPS in Luxembourg. Germany is in fourth place with 8.52 PPS.

There are also major differences worldwide. Internationally, the so-called Kaitz index is used to calculate the minimum wage. This expresses the relative value of the legal minimum wage by statistically reproducing the national median wages as a percentage.26 Worldwide, the highest minimum wage is in Australia at EUR 11.98 or 9.16 per PPS. Moldova is at the bottom with EUR 0.78 or 1.74 according to the PPS.27

4. Starting point and general conditions in Germany

4.1 Introduction of the minimum wage

With the Minimum Wage Act, which came into force on August 16, 2014, a general legal minimum wage of EUR 8.50 gross per hour was introduced for the first time in Germany on January 1, 2015.

The legal minimum wage was increased after January 1, 2017 to EUR 8.84 gross per hour and after January 1, 2019 to EUR 9.19 gross after the decision of the Minimum Wage Commission or the enactment of an ordinance by the Federal Government. Taking into account the increase to EUR 9.35 gross as of January 1, 2020, the minimum wage has been increased by 10 percent since its introduction, which corresponds to an annual increase of 2 percent.28

4.2 Scope of the legal minimum wage

The government parties have agreed that the Minimum Wage Act applies in principle to all employees in Germany. However, with the exception of some groups of people: Trainees and volunteers are excluded, since by definition they are not employees. Young people under the age of 18 who do not have completed vocational training or are in training are also excluded, and long-term unemployed people who are in the first six months of a new job. If the long-term unemployed continues to work for the respective company after the six months have passed, he will be entitled to the minimum wage, since he will eventually fall under the Minimum Wage Act.29 Interns are generally also considered to be employees entitled to minimum wage payments. However, there are exceptions to this rule, provided that it is a mandatory internship within the framework of school or vocational training or a course of study. Voluntary internships for vocational orientation are also excluded, if their duration is less than three months or if it is an internship as part of an entry-level qualification.30

4.3 Economic conditions

In order to become aware of the effects of the minimum wage, it is essential to consider the economic situation in Germany. Since Germany is still in a stable growth phase, with almost full employment and low inflation, the introduction and the increase in the minimum wage were in a very favourable economic phase. Gross domestic product (GDP) rose by 1.7 percent in real terms in 2015, compared to the previous year when the minimum wage was introduced. In 2016 it was 1.9 percent, in 2017 2.2 percent, and the trend is rising.

4.4 Highly affected industries by the minimum wage

There are certain sectors of the economy that are more or less affected by the minimum wage. Taking into account the exempted groups of the minimum wage, on the basis of the 2014 earnings structure survey, the sectors most affected by the minimum wage were defined, which in 2014 had the highest percentage of employees with an hourly wage below EUR 8.50 gross , taxi, gaming, betting and lottery sectors and the gastronomy, in which the percentage is over 50 percent, are particularly affected. But janitorial services, call centres and retail are also affected above average in contrast to the other sectors.


1 Cf. International Labour Organisation (2014)

2 Cf. Simpliance (2018)

3 Cf. Krüsemann (2014)

4 Cf. Schob et al. (2014)

5 Cf. Bosch/Weinkopf (2006)

6 Cf. Katz/Krueger (1992)

7 Cf. Koch (2015), p. 17

8 Cf. Young (1998), p. 75

9 Mais Retorno (2017)

10 Cf. Koch (2015), p. 18

11 Cf. Koch (2015), p. 19

12 Cf. Koch (2015), p. 19 f

13 Young (2019)

14 Cf. Card/Krueger (1997), p. 773

15 Cf. Ragacs (2002), p. 15

16 Cf. Card/Krueger (2015), p. 12f

17 Cf. Koch (2015), p.

18 Cf. Henneberger/Keller (2004)

19 Cf. Schuster (2013)

20 Cf. Henneberger/Keller (2004)

21 Cf. Knabe et al. (2014)

22 Cf. Schulten (2017)

23 Cf. WSI (2019)

24 Own representation

25 Own representation

26 Cf. Schulten (2016)

27 Cf. WSI (2019)

28 Cf. Schulten (2019)

29 Cf. BfJ (2014)

30 Cf. Ennemoser (2014)

Excerpt out of 32 pages


The effects of the legal minimum wage in Germany
University of Applied Sciences Riedlingen
Catalog Number
ISBN (eBook)
ISBN (Book)
Mindestlohn, Wage, SRH
Quote paper
Fabian Uyanakumarage (Author), 2020, The effects of the legal minimum wage in Germany, Munich, GRIN Verlag,


  • No comments yet.
Read the ebook
Title: The effects of the legal minimum wage in Germany

Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free