„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”. 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.
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. For example, the Ifo Institute in Munich forecasted a threat to up to 900 thousand jobs. 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.
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.
Table of Contents
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
Objectives and Research Themes
This paper aims to analyze the market reaction in Germany following the introduction of the legal minimum wage. It evaluates whether the predicted negative economic consequences materialized by comparing empirical data against established economic theories.
- Historical context and international comparison of minimum wage systems
- Theoretical evaluation of the competitive market model versus monopsony theory
- Impact of the minimum wage on total employment and social security contributions
- Structural labor market changes, including marginal employment and vacancy rates
- Corporate adaptation strategies regarding wages, working hours, and consumer prices
Excerpt from the Book
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
Summary of Chapters
1. Introduction: Outlines the definition of minimum wages and the controversial discussion surrounding the 2015 introduction of the 8.50 EUR wage in Germany.
2. Economic theories: Compares the competitive market model, which predicts employment losses, with the monopsony model, which suggests potential positive employment effects.
3. Basics of minimum wages: Provides definitions, types, and international benchmarks for minimum wage structures, including a comparison of European and global standards.
4. Starting point and general conditions in Germany: Details the legislative framework of the German Minimum Wage Act and identifies industries particularly affected by the regulation.
5. Effects of the minimum wage on employment: Analyzes statistical data regarding total employment, marginal employment, and unemployment rates post-introduction.
6. Discussion: Critically evaluates corporate responses, such as adjusted working hours and increased consumer prices, to compensate for higher labor costs.
7. Outlook: Summarizes the first five years of the minimum wage in Germany, concluding that neither extreme fears nor initial expectations were fully realized.
Keywords
Minimum Wage, Germany, Labor Market, Employment, Monopsony, Competitive Market, Social Security, Marginal Employment, Working Hours, Economic Theory, Wage Policy, Top-Ups, Poverty Risk, Labor Costs, Corporate Strategy
Frequently Asked Questions
What is the core focus of this student paper?
The paper examines the economic impact and labor market reactions in Germany following the implementation of a national legal minimum wage in 2015.
What are the central thematic areas covered?
The study covers economic theories, the legislative framework in Germany, employment statistics, corporate adaptation measures, and the international context of minimum wages.
What is the primary research goal?
The goal is to analyze if the predicted negative consequences, such as mass unemployment, occurred, and to explain how the market actually adjusted to the new regulation.
Which scientific methods are employed?
The author utilizes an analytical approach, comparing empirical data from the IAB (Institute for Labour Market and Vocational Research) and the SOEP (Socio-Economic Panel) with classic and modern economic theories.
What is addressed in the main body of the text?
The main body focuses on the transition from low-wage to minimum-wage employment, the role of marginal employment (mini-jobs), and how companies reacted through pricing and labor hour adjustments.
Which keywords best characterize this work?
Key terms include Minimum Wage, Labor Market, Monopsony, Employment, and Economic Theory.
How does the monopsony model differ from the competitive model regarding minimum wage?
The competitive model suggests that minimum wages cause unemployment, whereas the monopsony model suggests that a moderate minimum wage could actually increase employment in specific market conditions.
Why did some industries experience higher price inflation after the minimum wage introduction?
Industries heavily affected by the minimum wage, such as taxi services or gastronomy, increased consumer prices to compensate for the higher labor costs mandated by the law.
- Citar trabajo
- Fabian Uyanakumarage (Autor), 2020, The effects of the legal minimum wage in Germany, Múnich, GRIN Verlag, https://www.grin.com/document/536730
