Skip to main content

Advertisement

SpringerLink
Log in

Introducing minimum wages in Germany employment effects in a post Keynesian perspective

  • Regular Article
  • Published:
Journal of Evolutionary Economics Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5

Similar content being viewed by others

Notes

  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).

  3. 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).

  4. For a theoretical deduction of heterodox economics, see Heise and Thieme (2016: 1107ff.).

  5. To our knowledge, there are only three Post Keynesian studies on minimum wages, of which one is not in English (Seccareccia 1991) and the other two rather broad in nature (Herr et al. 2009; Herr and Kazandziska 2011).

  6. 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.

  7. „…, and the volume of employment is uniquely related to a given level of real wages – not the other way round“(Keynes 1936: 30).

  8. 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.

  9. 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.

  10. 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.

  11. 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.

  12. 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.

  13. “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).

  14. 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).

  15. 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).

  16. In different studies (see Knabe et al. 2014; Brenke and Müller 2013; Falck et al. 2013; Heumer et al. 2013; Kalina and Weinkopf 2013), the percentage of employees affected by the minimum wage in Germany, i.e. LA, ranges between 14% - 20% of total employment.

  17. 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°.

  18. 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’.

  19. 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.

  20. We excluded the following sectors based on the SOEP nace classification: waste and recycling, water supply, public administration, education, health services, interest groups.

  21. Blue-collar workers are covered by a sectoral minimum wage that is higher than the statutory minimum wage.

  22. 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.

  23. 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).

  24. 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.

Bibliography

  • Ashenfelter OC, Farber H, Ransom MR (2010) Labor market monopsony. J Labor Econ 28(2):203–210

    Article  Google Scholar 

  • Bachmann R, Bauer TK, Kluve J, Schaffner S, Schmidt CM (2008) Mindestlöhne in Deutschland: Beschäftigungswirkungen und fiskalische Effekte, RWI Materialien, No. 4

  • Bauer TK, Kluve J, Schaffner S, Schmidt CM (2009) Fiscal effects of minimum wages: an analysis for Germany. Ger Econ Rev 10(2):224–242

    Article  Google Scholar 

  • Bellmann L, Bossler M, Gerner H-D, Hübler O (2015) Reichweite des Mindestlohnes in deutschen Betrieben; in: IAB-Kurzbericht, No.6

  • Bofinger, P. (2015) Grundzüge der Volkswirtschaftslehre, Hallbergmoos

  • Bossler M, Gerner HD (2016) Employment effects of the new German minimum wage. Evidence from establishment-level micro data, IAB discussion paper 10, Nürnberg

  • Brenke K, Müller KU (2013) Gesetzlicher Mindestlohn: kein verteilungspolitisches Allheilmittel. DIW Wochenbericht 80(39):3–17

    Google Scholar 

  • Darity WA, Horn BL (1988) Involuntary unemployment independent of the labor market. Journal of Post Keynesian Economics 10(2):216–224

    Article  Google Scholar 

  • Davidson P (1994) Post Keynesian macroeconomic theory. A Foundation for Successful Economic Policies for the Twenty-first Century, Cheltenham

    Google Scholar 

  • Davidson P, Smolensky E (1964) Aggregate supply and demand analysis, New York

  • Doucouliagos H, Stanley TD (2009) Publication selection Bias in minimum-wage research? A meta-regression analysis. Br J Ind Relat 47(2):406–428

    Article  Google Scholar 

  • Felipe J, McCombie JSL (2005) How sound are the foundations of the aggregate production function? East Econ J 31(3):467

    Google Scholar 

  • Falck O, Knabe A, Mazat A, Wiederhold S (2013) Mindestlohn in Deutschland: Wie viele sind betroffen? Ifo-Schnelldienst 66(24):68–73

    Google Scholar 

  • Franz W (2007) Der trügerische Charme des Mindestlohns. Z Arbeitsmarktforsch 4:431–438

    Google Scholar 

  • Hamermesch D (1986) The demand for labor in the long run; in: Ashenfelter, O., Layard, R. (eds.); Handbook of Labor Economics, Vol. I, Amsterdam

  • Heise A (2017) Walras’ law in the context of pre-analytic visions: a note. Economic Thought 6(1):83–96

    Google Scholar 

  • Heise A, Thieme S (2016) The short rise and long fall of heterodox economics in Germany after the 1970s: explorations in a scientific field of power and struggle. Journal of Economic Issues 50(4):1105–1130

    Article  Google Scholar 

  • Heise A (2008) Economic governance and employment. Policy, Polity and Politics of Economic Rise and Decline, Berlin

    Google Scholar 

  • Heise A (1999) Grenzen der Deregulierung. Institutioneller und struktureller Wandel in Großbritannien und Deutschland, Berlin

    Google Scholar 

  • Heise A (1998) Ungleichheit und Beschäftigung aus makroökonomischer Perspektive; in: Heise, A. (ed.); Renaissance der Makroökonomik, Marburg, S. 241–266

  • Heitger B (2003) Minimum wages and employment: the case of German unification. Int Econ J 17(1):1–15

    Article  Google Scholar 

  • Herr, H., Kazandziska, M. (2011): Principles of minimum wage policy : economics, institutions and recommendations; Global Labour University working papers ; No.11

  • Herr H, Kazandziska M, Mahnkopf-Praprotnik S (2009) The theoretical debate about minimum wages. Global Labor University working papers No. 6

  • Heumer M, Lesch H, Schröder C (2013) Mindestlohn, Einkommensverteilung und Armutsrisiko; IW-Trends, Nr. 1

  • Hirsch BT, Kaufman BE, Zelenska T (2015) Minimum wage channels of adjustment. Industrial Relations: A Journal of Economy and Society 54(2):199–239

    Google Scholar 

  • International Labour Office (ILO) (2014): Minimum wage systems. General Survey of the reports on the Minimum Wage Fixing Convention, 1970 (No. 131), and the Minimum Wage Fixing Recommendation, 1970 (No. 135), Geneva

  • Kalina T, Weinkopf C (2013) Niedriglohnbeschäftigung 2011. IAQ Report:2013–2001

  • Keynes JM (1936) The general theory of employment. Interest and Money, London

    Google Scholar 

  • Kleinknecht A, Oostendorp RM, Menno PP, Naastepad CWM (2006) Flexible labour, firm performance, and the Dutch job creation miracle. Int Rev Appl Econ 20(2):171–187

    Article  Google Scholar 

  • Knabe A, Schöb R, Thum M (2014) Der flächendeckende Mindestlohn; in: Perspektiven der Wirtschaftspolitik, Vol. 15, No.2, pp. 133–157

  • König M, Möller J (2007) Mindestlohneffekte des Entsendegesetzes? Eine Mikrodatenanalyse für die deutsche Bauwirtschaft, Institut für Arbeitsmarkt- und Berufsforschung (IAB), IAB Discussion Paper No. 30/2007, Nürnberg

  • Kregel J (1984/85) Sidney Weintraub’s macrofoundations of microeconomics and the theory of distribution. Journal of Post Keynesian Economics 7(4):540–558

    Article  Google Scholar 

  • Lucas RE Jr. (1981) Studies in business cycle theory, Oxford

  • Machin S, Manning A, Rahman L (2003) Where the minimum wage bites hard: introduction of minimum wages to a low wage sector. J Eur Econ Assoc 1(1):154–180

    Article  Google Scholar 

  • Manning A (2003) Monopsony in motion, Princeton

  • Modigliani F (1944) Liquidity preference and the theory of interest and money. Econometrica 12(1):45–88

    Article  Google Scholar 

  • Mindestlohnkommission (2016): Erster Bericht zu den Auswirkungen des gesetzlichen Mindestlohns, Bericht der Mindestlohnkommission an die Bundesregierung nach § 9 Abs. 4 Mindestlohngesetz

  • Neumark D, Salas JMI, Wascher W (2014) Revisiting the minimum wage-employment debate: throwing out the baby with the bathwater? ILR Rev 67(3):608–648

    Article  Google Scholar 

  • Neumark D, Wascher WL (2008) Minimum Wages. The MIT Press, Cambridge

    Book  Google Scholar 

  • Paloyo AR, Schaffner S, Schmidt CM (2013) Special issue of the effect of minimum wages in Germany: editorial. Ger Econ Rev 14(3):255–257

    Article  Google Scholar 

  • Pigou AC (1933) The theory of unemployment, London

  • Pusch T (2018) Bilanz des gesetzlichen Mindestlohns: deutliche Lohnerhöhungen, aber auch viele Umgehungen. Wirtschaftsdienst 98(4):252–259

    Article  Google Scholar 

  • Pusch T, Rehm M (2017) Positive Effekte des Mindestlohns auf Arbeitsplatzqualität und Arbeitszufriedenheit. Wirtschaftsdienst 97(6):409–414

    Article  Google Scholar 

  • Pusch T, Heise A (2010) Central banks, trade unions, and reputation - is there room for an expansionist maneuver in the European Union? Journal of Post Keynesian Economics 33(1):105–126

    Article  Google Scholar 

  • Sachverständigenrat (SVR) (2013) Jahresgutachten 2013/14: Gegen eine rückwärtsgewandte Wirtschaftspolitik, Wiesbaden

  • Schmitt J (2013) Why does the minimum wage have no discernible effect on employment? Center for Economic and Policy Research, New York

    Google Scholar 

  • Schuster T (2013) Mindestlohn. Beschäftigungsrisiken höher als behauptet; IW policy paper 19, Institut der deutschen Wirtschaft, Cologne

  • Seccareccia M (1991) Salaire minimum, emploi et productivité dans une perspective post-keynésienne. L’Actualité économique 672(1991):166–191

    Google Scholar 

  • Setterfield M (2006) Effective demand and endogeneous money in a pathdependent economy: towards a “Moorian“ credit supply curve – and a reconciliation between horizontalists and structuralists?, in: Setterfield, M.; Complexity, Endogenous Money And Macroeconomic Theory : Essays in Honour of Basil J. Moore, Cheltenham (: Edward Elgar), pp. 119–139

  • vom Berge P, Kaimer S, Copestake S, Croxton D, Eberle J, Klosterhuber W (2017): Arbeitsmarktspiegel : Entwicklungen nach Einführung des Mindestlohns, Ausgabe 3, IAB, Nürnberg

  • Weintraub S (1957) The micro-foundations of aggregate demand and supply. Econ J 67(267):455–477

    Article  Google Scholar 

  • Wolfson P, Belman D (2014) What does the minimum wage do? Upjohn Institute for Employment Research, Kalamazoo

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Socioeconomics, University of Hamburg, VMP 9, D-20146, Hamburg, Germany

    Arne Heise

  2. Hans Böckler Stiftung, WSI, Hans-Böckler-Str. 39, D-40476, Düsseldorf, Germany

    Toralf Pusch

Authors
  1. Arne Heise
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Toralf Pusch
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Arne Heise.

Ethics declarations

The authors declare that they have no conflict of interest.

Additional information

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Heise, A., Pusch, T. Introducing minimum wages in Germany employment effects in a post Keynesian perspective. J Evol Econ 30, 1515–1532 (2020). https://doi.org/10.1007/s00191-019-00652-9

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00191-019-00652-9

Keywords

JEL codes

Search

Navigation