In July this year, the minimum wage rose to 10.45 euros gross per hour. In October, the minimum wage will be raised further to 12 euros. A study by ZEW Mannheim on behalf of the German Minimum Wage Commission now shows that the introduction of the minimum wage in 2015 as well as the first increase in January 2017 hardly caused any companies to exit the market. The researchers also observed that it even made some sectors become more productive, promoting competition overall.

The ZEW study analysed the influence of the minimum wage on certain indicators of competition, including market exits and labour productivity. “Our analysis was focused on the increase in overall wage costs caused by the minimum wage and how this ultimately affected the competitive conditions of companies,” says Moritz Lubczyk, a researcher in ZEW’s “Economics of Innovation and Industrial Dynamics” Department and co-author of the study.

One important finding is that both the introduction of the minimum wage in 2015 and its first increase in 2017 did not significantly change the intensity of competition for companies in Germany. In labour market regions where more employees earned less than 8.50 euros per hour before the introduction of the minimum wage, some micro-enterprises, i.e. companies with four or fewer employees, exited the market. This was primarily observed in eastern German states, where gross average wages at the time of study in 2015 were significantly lower than in West Germany. From an economic policy perspective, this may not necessarily be a problem. “Less productive companies are often the ones that exit the market. However, an increase in unemployment was not observed. As long as labour demand is high, the employees will find employment with other companies,” says Moritz Lubczyk.

Higher minimum wage = more efficient work?

However, the study not only confirms that the minimum wage had little impact on market exits. It also shows that labour productivity, i.e. turnover in relation to the number of employees, increased in the sectors that were most affected by the introduction of the minimum wage (including gambling, betting and lottery, advertising and publishing). The study gives various explanations: “One possible explanation is that companies are investing more in capital, for example in machinery or technology. As a result, their employees work more productively. Another explanation is that companies have increased the number of employees subject to social security contributions and reduced marginal employment, which also increases labour productivity,” says Lubczyk. He adds: “The average productivity of a sector increases when less productive companies exit the market.”

The research was based on data from the Mannheim Enterprise Panel (MEP), the Structure of Earnings Survey (VSE) and data sets from the Integrated Employment Biographies (IEB) for sectors and regions. In order to determine the significance of the changes, data from 2010, i.e. long before the introduction of the minimum wage, to 2018 were analysed.

Date

05.08.2022

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