Minimum wage of 12 euros: Risks of job losses increase, poverty unlikely to decline


Dr. Dominik Groll, labor market expert at the Kiel Institute for the World Economy, comments on the planned increase of the statutory minimum wage in Germany to 12 euros per hour as of October 2022, which is to be approved by the Federal Cabinet today:

Dr. Dominik Groll - Kiel Institute Statements - Forecasting Center - Topics: Business Cycle, Labor Market, Migration

"The exceptionally strong increase in the minimum wage to 12 euros is likely to have greater consequences than its introduction in 2015. At such a high minimum wage, the risk of employment losses in the affected wage groups increases substantially. This holds even where employers have a relatively large wage-setting power and thus market power vis-à-vis employees. Moreover, the higher minimum wage is unlikely to reduce poverty or income inequality. A minimum wage is unable to reach the vast majority of those at risk of poverty, who are mainly pensioners, self-employed, unemployed, or part-time workers. At the same time, only a relatively small share of low-wage earners lives in households that are at risk of poverty, while significantly more live in middle- or high-income households.

According to the scientific studies available so far, the introduction of the minimum wage in 2015 increased hourly wages but caused the number of hours worked to fall. Monthly wages remained unchanged, which is another reason why a reduction of poverty or income inequality failed to materialize. Furthermore, the minimum wage introduction led to a reallocation of workers between firms. Importantly, there is evidence of employment losses, and they are larger than they appear at first glance. First, the studies so far were able to consider only short-term effects one to two years after the introduction of the minimum wage; the long-term effects are likely to be larger. Second, the reduction in working hours must be added to the job losses to determine the total employment loss. And third, it is estimated that the minimum wage was not paid in many cases, especially in the first few years after its introduction. When all of these factors are taken into account, the estimated employment losses are well within the range of the forecasts published prior to the introduction of the minimum wage.

The promise of a significantly higher minimum wage sounds tempting, but it is very unlikely to achieve its desired objectives."

More details on the lessons learned from the minimum wage introduction can be found in this presentation: