Employment effects of wage subsidies and minimum wages. The reform of the low-wage labor market in Germany

In this contribution employment effects of wage subsidies and a minimum wage are analyzed for Germany. Existing studies for the construction sector and simulations of a statutory minimum wage unanimously point to employment losses of a general minimum wage for Germany. The magnitude of the negative employment effects depends on the minimum wage level, reactions on the goods market and the coverage of the minimum wage (inclusion of apprentices, marginally employed). For a minimum wage of 7.5 OE per hour we estimate a total employment loss of 220,000 individuals, mostly in jobs not covered by social security. Evaluations of existing wage subsidies in Germany find only minor labor supply incentives. Here, the revenueneutral "employment bonus" which subsidizes small hourly wages and not low wage incomes is considered. The "employment bonus" would induce an increased labor supply of 80,000 persons at the extensive and 420,000 fulltime equivalents at the intensive margin. If an employee oriented wage subsidy is combined with a statutory minimum wage its labor supply effects were rendered ineffective. Simulation results show that in this case employer-oriented wage subsidies could compensate higher wage costs and partially diminish employment losses induced by the minimum.