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.
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For an overview, see Neumark et al. (2014).
Most simulation studies for Germany predicted a loss of more than one million jobs (i.e. about 3% of total employment!) if the current minimum wage of 8,50 € were to be introduced (see, e.g., Schuster 2013: 33).
For a theoretical deduction of heterodox economics, see Heise and Thieme (2016: 1107ff.).
Of course, ever since Franco Modigliani’s extension of Hicks’ ISLM interpretation of Keynes’ General Theory (see Modigliani 1944), the labor market and employment determinantion have played a significant role in those economic approaches that are termed ‘Keynesian’. However, to our knowledge, other than monetary Keynesianism, there is no other Post Keynesian approach that attempts explicitly to reject traditional labor market reasoning and to take seriously Keynes’ claim that the real wage is no exogenous control or distributive device, but is endogenously determined pari passu with the quantity of employment.
„…, and the volume of employment is uniquely related to a given level of real wages – not the other way round“(Keynes 1936: 30).
Throughout this paper, we will call the virtual place of employment determination from a Post Keynesian perspective the ‘employment market’, in order to distinguish it from the ordinary ‘labor market’ of neoclassical provenance.
The focus of this paper is to investigate the effect of the introduction of minimum wages on employment using a two-sector model. Therefore, a (comparative) static approach is pursued, keeping as many variables as constant as possible.
This, of course, is a very delicate assumption for a post-Keynesian model. It is set forth here only for the sake of simplicity and to reduce the complexity of the model.
Post-war (West) German economic history, for instance, showed a period of ‘over employment‘up until the early 1970s (when migrant labor was invited into Germany to fill the rising number of vacancies), ‘full employment’ until the first oil crisis in the mid-1970s (when unemployment and job vacancies were approximately equal in number) and unemployment ever since.
This result rests on two assumptions: (1) a closed economy; and (2) endogenous money. Of course, the assumption of a closed economy is not very realistic. But the introduction of external economic relations does not necessarily produce a different result (this depends on the exchange rate system) or would imply a beggar-thy-neighbor strategy. The second assumption is, of course, a basic Post Keynesian assumption, which undermines the likelihood of positive real-balance effects in favor of negative real-balance effects in the event of a severe deflationary process.
“In the light of these considerations I am now of the opinion that the maintenance of a stable general level of money-wages is, on the balance of considerations, the most advisable policy for a closed system; …” (Keynes 1936: 270).
This, of course, may be seen critically by Sraffians. However, it conforms to Keynes‘acceptance of the ‚first fundamental postulate‘in the General Theory (Keynes 1936: 5ff.). Moreover, we interprete Sraffa’s critique not as a complete refutation of a ‘well-behaved‘production function but as the theoretical proof that the particular properties of a ‘well-behaved‘aggregate production function (i.e. the falling marginal productivities of the factors of production) may not hold in any case. However, the empirical validity of this theoretical possibility is still open to discussion (see e.g. Hamermesch 1986, Felipe and McCombie 2005).
Of course, sector A will comprise firms from many different industrial sectors and branches. In Germany, most firms with most of the employees that will be affected by the minimum wage legislation are from branches such as agriculture, forestry and fishing, retail, transportation, food and beverages, and hotels and restaurants (see Bellmann et al. 2015).
Specifying eq. 1 and eq. 2 and assuming, for the sake of simplicity, that only wage earners consume and no governmental spending, we get: Zi = (πi/ωi) wi Ni and Di = ci,i wi Ni + ci,j wj Nj + Ii with πi = average labor productivity in sector i and ωi = marginal labor productivity in sector i; wi = nominal wage rate in sector i and Ni = employment in sector i; ci,j = marginal propensity to consume commodities from sector j of wage earners from sector i and Ii = (autonomous) investment spending on commodities of sector i. Now, the rate of change of employment with respect to the rate of change of the nominal wage rate depends on the relative rate of change of the D- and Z-functions: Ni° | wi° = ci,i° Ni° - (πi° - ωi°). Defining ci,i° = ηi,i; πi° - ωi° = εi and k = share of employment in sector i (and, respectively, (1-k) as employment share of sector j), we get: N° = k (ηi,i + ηj,i – εi – 1) wi° + (1 – k) (− ηj,j - ηi,j + εj – 1) wj°.
Herr et al. (2009: 12) come to the following conclusion with respect to employment effects of minimum wages in a Post Keynesian approach: „…minimum wages will change the structure of wages, the structure of prices, the structure of demand for final products and the structure of demand for inputs. How employment is affected is theoretically open and extremely difficult to predict empirically.” If ‘theoretically open’ is to mean that there may be different Post Keynesian model specifications with potentially different results, the statement is correct but also somewhat trivial. Whether the effects are ‘extremely difficult to predict’ depends on the specific model specification – formal specifications as opposed to narrative approaches, at least, offer the charm of making prediction rather easy. Whether such predictions can easily be falsified empirically, is yet another question and depends on the testability of the theoretical predictors. But, maybe, that is what they meant by ‘extremely difficult to predict empirically’.
Pigou’s Theory of Unemployment (Pigou 1933), which Keynes explicitly criticized in his General Theory, can still be seen as the foundation of modern labor market theory.
We excluded the following sectors based on the SOEP nace classification: waste and recycling, water supply, public administration, education, health services, interest groups.
Blue-collar workers are covered by a sectoral minimum wage that is higher than the statutory minimum wage.
In all other cases where there was a low (<20%) share of private household consumption in the sectoral production according to the input-output table, a regard for the composition of inputs for sectors A/B (with higher household consumption share) did not change the sector classifications given by the share of workers below the minimum wage.
Although this number is reasonably close to our simulation and much nearer to the above-mentioned forecasts of job losses in the range of one million and more, it should be noted that the DiD design of Bossler and Gerner refers more or less to gross job losses in our sector A. Moreover, work time effects were not taken into account. Simultaneous to the minimum wage introduction there has been a substantial conversion of mini-jobs with low working time into longer working time employment subject to social insurance (albeit mainly part time) as recent results have shown (vom Berge et al. 2017).
Sectors A and B here deviate slightly from the compilation of section 4. The reason is data availability in the most recent statistics of the German Federal Statistical Office. Sector A of fig. 5 comprises agriculture, hotels, restaurants and transportation. Sector B of fig. 5 comprises manufacturing and telecommunication/postal services.
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Heise, A., Pusch, T. Introducing minimum wages in Germany employment effects in a post Keynesian perspective. J Evol Econ (2019). https://doi.org/10.1007/s00191-019-00652-9
- Post Keynesianism
- Minimum wage
- Aggregate demand
- Aggregate supply
- B 50
- E 12
- E 23
- J 31