Why do some economists reject minimum wages?

minimum wage

Definition, demarcation and goals

A minimum wage is the lowest legally permissible wage that is stipulated by statutory or collective bargaining agreement. A minimum wage regulation can refer to the hourly rate or the monthly wage for full-time employment. In addition to national minimum wages, there are also regional, branch-specific or occupation-specific variants as further manifestations. While most member states of the European Union (EU) have a nationwide statutory minimum wage, Austria, the Scandinavian countries and Italy do not. However, in these countries the collective bargaining agreement is much higher than in Germany, either through compulsory membership in the respective chambers or a high degree of organization of the trade unions and thus under collective agreements or - as in the case of Italy - constitutionally secured.

The introduction of minimum wages is pursued two main goals:

  • Firstly, workers with little bargaining power and power of representation are to be protected from exploitation by employers and from wage dumping.
  • Secondly, poverty should be combated despite paid work (working poor) and the employed should be able to secure the subsistence level or an adequate livelihood should be guaranteed.

In general, minimum wages aim to raise the prosperity of the lowest and low-skilled and thus the lowest or low-paid (human capital theories; labor market theories) through a higher wage and to prevent them from becoming a working poor (“poor despite work”) . Securing livelihoods through gainful employment can thus contain an important public interest and its implementation can contribute to the maintenance of social peace. The introduction of the minimum wage is, however, an intervention in the functioning of the labor market. This begs the question of what effects this has.

The introduction of statutory minimum wages has repeatedly been the subject of controversial discussions in German-speaking countries. The debate is fueled by the fact that full-time employment does not always and increasingly less often protects against in-work poverty and poverty in general. The article first deals with connections in general from a theoretical perspective of the theory of market forms and then goes into the specific situation and problems in Germany before and after the introduction of the statutory minimum wage at the federal level.

Theoretical perspective

State intervention in markets with perfect competition can only be justified if there is market failure (e.g. positive or negative external effects not internalized in market prices), which can be corrected by suitable instruments in the direction of an efficient equilibrium solution. In the diametrically opposite case, the market form of the monopson, which has long been described as an unrealistic anomaly and often as an "intellectual curiosity", it can make perfect sense to improve the market result, which is characterized by a loss of welfare and thus economically inefficient, by introducing a binding minimum wage.

The basic theoretical analysis shows that an economically efficient equilibrium on the labor market can be achieved with different market forms: no loss of welfare and thus the maximum possible amount of employment are automatically realized in the market equilibrium with fully functioning competition, but also through the introduction of a binding minimum wage for an employer who has market power, realizable in the amount of the market equilibrium wage. This connection leads to two essential findings: If a textbook-like functioning labor market is considered, which is characterized by complete competition on both sides (Market form of the polypole), should never be intervened in the market for reasons of efficiency. However, is it a labor market in which there is only one demand for a homogeneous workforce (Market form of the monopson), it can make perfect sense to introduce a statutory minimum wage and thereby increase overall welfare; notably at the expense of the monopsonist's profit and in favor of the income situation of the employees.

In reality, the market form of full competition is rather rare, e.g. when unqualified or poorly qualified work is exchanged between homogeneous employers and homogeneous workers who are both mobile. The market form of the monopsy is also rather rare in reality, e.g. the dominance of an employer for a certain homogeneous work performance of (largely) immobile workers in a certain region. The geographical immobility of the employees results mainly from the fact that the wages gained from changing jobs would not cover the associated mobility costs (transaction costs). A local employer can of course also enjoy significant market power for several professions or qualifications that are only in demand by him.

Research has therefore turned to the more relevant market forms in reality, which are to be located between the two extremes of complete and non-existent competition on the employer side. Because a certain, often at least temporarily occurring, market power to set wages also exists in markets with a heterogeneous workforce and incomplete information. Even smaller companies can develop a certain degree of market power in segmented, differentiated and non-transparent labor markets. The new monopson theory therefore emphasizes company-specific further training and the resulting bond-specific effects (segmentation theories, human capital theories; see labor market theories) as well as the immobility of the workforce, which has various causes, which is why employers can nevertheless exercise market power. Also dealing with the Market forms of the oligopson (a few large employers ask for the same workers) or the monopsonistic competition (many small employers ask for similar workers) shows that the introduction of a minimum wage can also lead to an increase in total employment. While in the first case there is a sometimes considerable decline in profits for the individual (large) companies, in the second case the number of companies (very small in this type of market) is reduced.

In principle, an expansion of the perspective to more realistic market forms or a longer time horizon allows the employment effects of a minimum wage to be more differentiated and in many cases more positive come to fruition. A binding minimum wage creates incentives for companies to invest in human capital, to increase productivity through innovations and to eliminate inefficiencies in the allocation of resources. At the same time, it encourages employees to quit less frequently themselves, to invest more in their education in order to increase their labor productivity, and it encourages them to give up their productivity in order to benefit from the higher minimum wage for as long as possible (efficiency wage theories; cf. Labor market theories). At the same time, minimum wages create incentives for the unemployed and job seekers to increase their search efforts for jobs, since gainful employment becomes more attractive when they re-enter the labor market (addiction theories; cf. labor market theories). Therefore, these people are more likely to accept a job offer, and thus more frequently, just to indicate a few additional aspects to be taken into account.

In addition, the thesis often heard by economists in the past, that the minimum wage policy is associated with the risk of higher unemployment because the supply of labor increases and the demand for labor decreases, is hardly empirically confirmed. Various studies that have been carried out in recent years have shown that this risk - with the exception of adolescents - does not exist or only exists to a very limited extent.

Finally, the integration of the microeconomic labor market theory in a Keynesian-oriented, macroeconomic cycle-theoretical demand model (Keynesianism) proves that the Purchasing power effect Higher wages of low earners due to their high marginal consumption rate and very low savings rate emphasized as advantageous. It means that the introduction of a statutory minimum wage is also assessed more positively and generates additional labor demand. This connection applies in particular when production capacities are not fully utilized and the increase in the overall economic demand for goods (positive income effect) is not thwarted by a corresponding increase in the price level (opposite price effect in the case of full employment). Finally, if the introduction of a minimum wage leads to higher investment in human capital and / or to technological advances, this can have positive effects on the Economic growth enter.

These explanations show that the relationship between the minimum wage and the level of employment by no means unambiguous is. Empirical studies also show that there is often no clear connection between the two variables, so that the effects of a minimum wage on employment can be negative, zero or positive. Even in low-wage jobs, where the market form of perfect competition can most likely be adopted, which is why economists and employer representatives often cite this as an example of the destruction of jobs when a statutory minimum wage comes into effect, a more recent study shows: All increases in US minimum wages from 1990 until 2006 had no employment effects. The low-skilled almost always earned more afterwards, so that their income situation actually improved.

Recent labor market research shows a number of cases in which the introduction of a general minimum wage is to be advocated for economic reasons. Nevertheless, the majority of economists still reject statutory or collectively agreed minimum wages, albeit with varying arguments. Recently, the wage compression triggered by the introduction of minimum wages for low-wage earners has been viewed as unfair and demotivating for normal wage earners, the rising reservation wages ascertained in laboratory tests after the temporary introduction of minimum wages has been admonished as an indication of increased expectations or the motivational effect of voluntarily paid efficiency wages. Because a number of relatively current meta-analyzes, which combine the results of the largest possible number of empirical primary studies and evaluate them statistically, only determine (very) minor employment effects, so that there is in fact an employment inelasticity or, more precisely, an employment elasticity of the minimum wage of close to zero, the focus is shifting the critics of minimum wages now move from the comparative-static to the dynamic dimension of the argument. It is warned that only a few jobs will be cut as a direct effect after the introduction or increase of the minimum wage, but that job growth could be inhibited in the long term. So that is a Paradigm shift on the question of the employment effects of minimum wages far from in sight.

Positions and current developments in Germany

The introduction of a statutory minimum wage remains among economists controversial. In the case of the US labor economists, who are often cited in the discussion in the Federal Republic of Germany, two camps are still diametrically opposed. Opponents generally reject a minimum wage, mainly because they fear negative consequences for the level of employment and job growth. The proponents consider the premises of this position to be unfounded and the fears to be exaggerated or irrelevant. In the Federal Republic of Germany, the majority of economists still advise against it, while a growing minority is in favor of its introduction. The opponents mostly argue on the basis of American studies, deductive derivations from competitive models of the labor market as well as model calculations or microsimulation models; the propagandists refer primarily to current studies in several countries, to meta-analyzes and evaluation studies on industry-specific minimum wages.

The parties to the collective bargaining agreement also took different positions. The majority of employers' associations strictly rejected minimum wages, citing negative employment effects. Several unions, especially those in the private service sectors, have voted vehemently in favor of its introduction since the mid-2000s; To justify this, they referred, among other things, to the long-term decreasing coverage rates of collective bargaining agreements at branch and company level or the existence of sectors without collective bargaining agreements (labor relations), the significant increase in atypical employment relationships (atypical employment), the long-term considerable expansion of the low-wage sector (low-wage sector) with a growing number at Working poor as well as increasing social inequality and ideas of (Distributive) justice. A gradually increasing number of collective bargaining partners in around 20 particularly affected sectors (including construction, building cleaning, care industry, meat industry, hairdressing, waste management, seasonal work in agriculture, temporary work (temporary workers)) agreed industry-specific minimum wages over the years; These collective bargaining partners thus tread a path on a contractual basis that was not legally available for a long time.

This fundamental controversy among economists and collective bargaining parties continued between the parties and in the governing coalitions. Since the political majorities necessary for the introduction did not come about for a long time due to the changing composition of the governments, Germany belonged to the minority of EU member states that did not have a general, nationwide minimum wage. Only the government of the third grand coalition of CDU / CSU and SPD, which came into office in 2013, decided to introduce it in mid-2014 with the "Law to Strengthen Collective Bargaining Autonomy (Tariff Autonomy Strengthening Act)" of 11.08.2014 (Federal Law Gazette I p. 1348). The statutory minimum wage is intended to encourage the undercutting competition between companies at the expense of the workforce (Protection thought) and at the expense of the financial stability of the social security systems (Thought of distortion of competition) can be contained without fundamentally jeopardizing the development of employment (potential growth, Full employment idea) (Full employment). When it was introduced on January 1, 2015, the nationwide minimum wage was EUR 8.50 gross per hour; on January 1, 2017, there was an increase to EUR 8.84.


The fundamental decision on the introduction by no means solves the problems of implementation or implementation. At the same time, the second main objective cannot be achieved for all affected groups of employees:

  • In addition to the time of its introduction, the level of the minimum wage is of decisive importance for its effects on the level of employment. The lower the lower wage limit, the lower the number of employees affected and thus the lower the effect. In a comparison of the Western European EU countries, the politically determined amount of 8.50 euros marks rather a Lower limit; it corresponds to approx. 50% of the average wage of full-time employees (median wage). This level can take into account the uncertainty in the phase after the introduction. However, it does not eliminate the income problems of the low-wage earners and is therefore hardly preventive of poverty. Top-ups, which are disproportionately common in atypical employment relationships (especially in Mini jobs) only benefit to a very limited extent from the introduction. Top-up (approx. 1.2 million) are people who earn an income (overwhelming majority) or unemployment benefit or partial unemployment benefit (minority of around 60,000 unemployed top-ups in 2017), but at the same time (further) state transfer payments to secure the socio-cultural subsistence level (Unemployment benefit II) have to claim (subsistence level). Since the reasons for their neediness are diverse, namely low hourly wages, low labor force participation with few working hours or a large number of household members, the introduction of a minimum wage on an hourly basis has at most a minor relief effect.
  • The first empirical evaluation studies do not confirm the widely voiced fears that the introduction of the general minimum wage would result in significant job losses. The positive development in employment that existed before the introduction continues. The employment structure is changing: the number of mini-jobs decreases moderately - with high persistence; approx. half of the departures are due to conversion to social security (mainly part-time) employment. Employees in private service sectors benefit most (e.g.Retail, hospitality, guard and security services). When differentiating between forms of employment, mini-jobbers are the winners. In total - excluding the exceptions mentioned (see the next two mirror points) - around 4 million jobs (a good 11 percent) are affected, women are clearly overrepresented. Minimum wage-related dismissals are seldom made in the companies concerned. Rather, adjustments are made by reducing working hours and increasing workload as well as reluctance to hire. Some companies also raise sales prices. The slight decline in the number of full-time employees at risk of poverty (working poor) between 2014 and 2015 could indicate the first effects of the minimum wage in this area as well.
  • Those ultimately decided as political compromises remain highly controversial between parties and collective bargaining partners Exceptionswhose long-term effects have to be awaited: young people under the age of 18 without vocational training, long-term unemployed in the first six months after taking up employment, trainees and students who complete compulsory internships as well as voluntary internships of up to three months for orientation or to accompany training. There are no differences between East and West Germany. - In this context, it should be noted that the intended effect of the minimum wage decreases with the number of exceptions made or those affected; Women and employees in eastern Germany are disproportionately affected. There are also legal concerns: Group-specific exceptions violate the principle of equal treatment guaranteed in the Basic Law. Finally, distortions in the labor market within the meaning of the of displacement effects in favor of the excluded groups occur. An initial survey of the long-term unemployed indicates, however, that the exemption for this group of people has only rarely been used, at least so far.
  • The minimum wage was introduced at the beginning of 2015. However, as part of a Transitional arrangement Collective agreements in which lower wages were previously agreed will continue to apply until the end of 2017 if they have been declared generally binding. On the one hand, these long notice and transition periods and the extended introduction make it easier for companies, such as newspaper manufacturers, to adapt and prevent otherwise possible job losses; on the other hand, they delay the effects and reduce the number of workers directly affected.
  • Without regular adjustments When the general price level rises (inflation), the real equivalent of the nominal minimum wage gradually erodes, as the example of the US Federal Minimum Wage shows time and again. Therefore, procedures and institutions must be put in place to make recommendations on more or less regular adjustments. Based on the example of the Low Pay Commission in Great Britain, a permanent commission of the collective bargaining partners is set up, which consists of the chairman, three permanent representatives from each of the umbrella organizations of employers and trade unions, and two non-voting scientists. This so-called Minimum wage commissionsubmits proposals to adjust the level of the minimum wage, which the Federal Government can make binding by means of a statutory ordinance, within the framework of a weighing up of the overall economic development, in particular the average collectively agreed hourly wages (tariff index). The commission met for the first time in 2016 and will meet regularly thereafter every two years to meet. It is not yet possible to assess whether their work, as some observers fear, is made more difficult by the repetition of the fundamental discussion about the benefit vs. harm of the general minimum wage and influenced by the calculations of political election cycles, or whether it contributes to the extensive objectification of the discussion. In any case, she initiated the first minimum wage increase.
  • The implementation the minimum wage must not only be accompanied by information, for example via a hotline. It has to be controlled in order to avoid the achievement of unfair competitive advantages through non-compliance. Therefore, procedures and instances must be put in place to prevent opportunistic behavior (including unpaid overtime, bogus self-employment, contracts for work and services, undeclared work or shadow economy). Works councils are often ruled out as supervisory bodies: The operational coverage rates are particularly low in the sectors that are affected above average (especially the private service sector, such as restaurants and retail) as well as in small and medium-sized businesses, i.e. works councils often do not exist. The tasks are taken over by the customs administration authorities, where additional posts are to be set up in the medium term. The existing human resources of the responsible financial control of illegal employment (VCS) are not sufficient to achieve an effective control density.

Last but not least: In general, the effects of a moderate minimum wage should not be overestimated. Its introduction is therefore accompanied by other measures that the law provides for strengthening collective bargaining autonomy: Stabilization of the collective bargaining system, which has been eroding since the 1990s, by increasing the collectively agreed coverage rates by making it easier to declare general applicability of collective bargaining agreements (Section 5 TVG) and expanding the one that came into force in 1996 Posted Workers Act (AEntG).

Minimum wages are only conditionally suitable for combating poverty: they have an impact Participation in the labor market to a sufficient extent ahead, which is especially not the case with atypical employment relationships (such as mini jobs). Furthermore, a distinction must be made between the individual and the household situation. The expected, group-specific differing distribution effects, which are to be distinguished from the frequently examined employment effects from an analytical perspective, also require further analyzes, such as the wage structure and fiscal effects. It should be mentioned that some proponents of the minimum wage are calling for a European minimum wage policy.