A study on the introduction of the minimum wage in Germany shows that low-wage earners in particular have benefited.
(Photo: dpa)
The minimum wage is one of the most controversial labor market policy measures. This year’s Nobel laureate in economics, David Card – together with his colleague Alan Krueger, who has unfortunately passed away – made groundbreaking empirical contributions to minimum wage research.
In the early 1990s, his studies challenged the prevailing orthodoxy that a minimum wage led to ever lower demand for labor and job losses. Nobel laureate James Buchanan once formulated the dominant stance at the time: “Just as no physicist would claim that water can run uphill, no self-respecting economist should claim that the minimum wage increases employment.”
Philipp Heimberger is an economist at the Vienna Institute for International Economic Studies (wiiw).
In an article published in 1992, Card and Krueger show by applying then new statistical methods to determine causal effects that the introduction of the minimum wage in New Jersey had no negative effects on employment. That is not to say that a minimum wage does not under any circumstances reduce employment. As the literature following Card and Krueger shows, it depends on the extent and speed of the increase and the macroeconomic framework.
But the fact that the employment effects of minimum wages are concentrated around zero is a result that has now been well established and that has overturned the long-standing orthodoxy. A gentle, periodic increase in the minimum wage can raise low wages, reduce income inequality and increase productivity without causing large job losses.
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In an article recently published in the leading economic journal “Quarterly Journal of Economics”, a team led by Christian Dustmann examines the effects of the introduction of the nationwide minimum wage in Germany in 2015.
Redistribution helps low wage earners
The results show that the minimum wage increased wages but did not decrease employment. The minimum wage also led to a redistribution of low-wage workers from smaller to larger, from lower-paying to better-paying, and from less productive to more productive establishments.
This means: The results suggest that the warnings of massive negative effects on the labor market that were heard from many quarters before the introduction of the minimum wage did not come true.
David Card, this year’s Nobel laureate in economics, is the first author mentioned by the research team in the study on the German minimum wage in the acknowledgment. The Germany study cites a total of six papers with Card as (co-) author. Card’s work has a lasting major influence on economically relevant labor market research – also for Germany.
More: When natural experiments shake beliefs: Nobel Prize in Economics for three economists.