The Minimum Wage in Germany: Institutional Setting and a Systematic Review of Key Findings

4.1 Coverage of the Minimum Wage

As already mentioned, there were approximately 4.0 million employees^[1] with hourly wages less than 8.50 euros in Germany prior to the introduction of the statutory minimum wage, according to data from the Structure of Earnings Survey (SES) from April 2014.^[2] This figure corresponds to 11.3 percent of all employees who were affected by the newly introduced minimum wage (Mindestlohnkommission 2016: 39). The incidence of affected workers declined thereafter. In 2018, before the second increase in the minimum wage, there were approximately 2.5 million employment relationships in Germany with hourly wages below the statutory minimum wage of 9.19 euros (Mindestlohnkommission 2020: 56). This was equivalent to a share of approximately 6.6 percent of total employment. At the beginning of 2020, approximately 2.2 million employees were affected by the minimum wage increase to 9.35 since they had previously earned hourly wages below that value. This corresponded to a share of approximately 5.6 percent (Mindestlohnkommission 2023: 71). Coverage of the minimum wage increased again with the adjustment of the minimum wage by the Minimum Wage Commission to 10.45 euros in July 2022 (3.1 million jobs or 8 percent). With the legislative minimum wage increase to 12 euros in October 2022, the number and share of affected jobs increased further to 5.8 million or 14.9 percent of total employment (Mindestlohnkommission 2023: 71).

The proportion of jobs covered by the minimum wage varies across regions and groups of employees. Data from the most recent Earnings Survey (ES) from April 2022 indicate a greater proportion of employees with an hourly wage at or below the binding minimum wage of 9.82 euros in eastern Germany (4.4 percent) than in western Germany (3.8 percent) (Mindestlohnkommission 2023: 57). The proportion of affected women was also greater than that of men (4.3 percent; 3.4 percent). The same applies to employees with non-German nationality (5.6 percent) compared to German employees (4.1 percent). Coverage of the minimum wage was also more frequent than on average in companies with fewer than 5 employees (9.1 percent), among unskilled or semiskilled workers (9.4 percent), among fixed-term workers (6 percent) and among workers not covered by collective agreements (6.1 percent). Marginal part-time workers were particularly frequently affected by the minimum wage (14.7 percent). The differences between the employee groups were very similar at the introduction of the minimum wage and at its later adjustments (Mindestlohnkommission 2018: 64; 2016: 41).

4.2 Wages

Regarding the evaluation criterion of worker protection, the focus is on the effects of the minimum wage on the wages and incomes of employees. Assessments of the effects of the minimum wage on hourly wages have thus far been carried out mainly with micro data from the German Socio-Economic Panel (GSOEP).^[3] This survey contains information on monthly earnings and on contractually agreed and actual weekly working hours, which allows the calculation of hourly wages (Dütsch, Himmelreicher, and Ohlert 2019). The SES, an establishment survey, provides cross-sectional data and has been used for quasipanel analyses at the regional and establishment levels (Biewen, Fitzenberger, and Rümmele 2022; Ohlert 2022) and for descriptive analyses.^[4] The administrative data of the Integrated Employment Biographies (IEB) have been used less frequently, as they do not contain information on working hours on a regular basis. Studies using the IEB therefore supplemented or imputed working hours from other datasets. The IAB Establishment Panel (IAB EP), which is a representative panel of establishments in Germany, is also regularly used to study the effects of the minimum wage on company-level variables such as wage costs.

For the most recent period between 2020 and 2023, only descriptive results are available. In this period, the German labour market was influenced by the coronavirus pandemic, Russia’s war against Ukraine and the increase in the minimum wage by 15 percent to 12 euros per hour. To provide full insight into the effects that the minimum wage had on wages to date, first, the descriptive results for the recent period and then causal evidence for the years 2015–2019 are presented. Due to data collection problems during the coronavirus pandemic, there is no causal evidence on the effects of the minimum wage on wages for 2020 and 2021. In both the GSOEP and ES, working hours and wages were not correctly recorded during these years. As a result, there are only a few descriptive findings on hourly wages during the pandemic based on specific coronavirus surveys. The results indicate that employees affected by the minimum wage experienced above-average declines in earnings during the pandemic. This is mainly because workers affected by the minimum wage were often employed in economic sectors that were particularly heavily impacted by the pandemic and by the corresponding containment measures. Furthermore, workers with low wages were less likely to be able to work from home than workers with higher wages because their jobs often require physical presence (Jaenichen 2021; Kirchmann et al. 2022). Employees with hourly wages up to the minimum wage were in short-time work as often as employees with higher wages were, but they reduced their hours to a greater extent (Jaenichen 2021). They also reduced their working hours more frequently without being involved in short-time work. Overall, employees with low wages experienced greater relative declines in earnings during the pandemic than employees with higher wages did (Blom and Möhring 2021; Jaenichen 2021; Schröder et al. 2020). For regular employees (i.e. those subject to social security contributions), the earnings declines were partly compensated by short-time work benefits paid out by unemployment insurance. However, low-wage employees were less likely to receive company or collectively agreed-upon supplements of short-time benefits than employees with higher wages were (Jaenichen 2021). Marginal part-time employees (i.e. employees largely exempt from social security contributions) are not entitled to short-time work benefits at all.

In 2022, the minimum wage increased sharply in Germany on two occasions. In July, the minimum wage increased from 9.82 euros to 10.45 euros, going back to the decision of the Minimum Wage Commission in June 2020. As of 1 October 2022, the statutory minimum wage was raised by the parliament from 10.45 euros to 12 euros per hour. Figure 2 presents descriptive evidence on wage growth in 2022 in the minimum wage range based on data from the Earnings Survey in July and October. Employees in the minimum wage range received an increase in hourly wages of approximately 15 percent between July and October 2022; this applied to full-time workers, part-time workers and marginally employed workers. The development of monthly wages in the minimum wage range was approximately 16 percent between July and October 2022; it was significantly more pronounced for full-time and part-time employees than for marginal employees. The earnings threshold for marginal employment was increased from 450 euros to 520 euros at the same time as the minimum wage was increased to 12 euros, basically allowing an increase in monthly earnings from this form of employment of the same percentage as the minimum wage increase. Between July and October 2022, however, the monthly earnings of marginal part-time workers in the minimum wage range grew by only approximately 7 percent. The explanation for this unexpectedly low monthly wage growth is that at the same time, the average paid working time decreased by approximately 8 percent. For full-time employees, especially for part-time employees in eastern Germany, working hours in the minimum wage range rose slightly, which led to a somewhat greater increase in monthly wages than in hourly wages.

Figure 2:

Growth of hourly and monthly wages in the minimum wage range between July and October 2022. Note: Employment relationships in the minimum wage range are those with hourly wages less than 10.50 euros in July 2022 and less than 12.05 euros in October 2022. Source: July and October Earnings Survey (ES) 2022, own calculations.

For the period from 2015 to 2019, in contrast to the more recent period, causal difference-in-differences studies on hourly and monthly wages are available. In the table 1, the superscript letters and numbers indicate the empirical approaches of the studies. They denote if the bite measure is continuous or binary, if the data are employee or firm data, if the analysis is performed at the regional, firm or employee level, and if the dependent variable measures wage growth, change in wage growth or wage growth by quintiles.

Regarding the effects of the introduction of the minimum wage, studies based on the GSOEP found significant increases in hourly wages almost across the board, which were calculated with contractual working time (Bachmann et al. 2020, 2022; Burauel et al. 2018). These effects continued into 2019 and ranged between 3.9 percent and 6.7 percent for employees who had hourly wages below 8.50 euros before the introduction of the minimum wage. This finding was confirmed in the short run by Dustmann et al. (2022), who used the same approach but approximated hourly wages in the IEB. They measured a minimum wage effect on hourly wages of 6 percent in 2015. This finding was also corroborated by Ahlfeldt, Duncan, and Seidel (2018), who used IEB data and imputed hours worked. Even stronger effects were observed in two studies that differed more strongly in their approach from those previously mentioned. Caliendo et al. (2023b) analysed the GSOEP but ran difference-in-differences regressions by quintiles of the regional wage distribution. For the first quintile, they revealed a treatment effect of approximately 9 percent in 2015 and 21 percent between 2016 and 2018. Using the SES/ES of the years 2014 and 2015, Ohlert (2022) divided establishments into those affected by the minimum wage and those not affected; he reported an effect of 5.3 percent on average and of 13.2 percent on employees with hourly wages below 10 euros in establishments affected by the minimum wage. The lagged effects on contractual hourly wages suggest that there may have been short-term adjustments in contractual working hours. For employees affected by the first or second increase but not by the introduction of the minimum wage, no statistically significant effect on hourly wages could be detected. There is less evidence on the minimum wage effects on hourly wages that are calculated with actual working time (including unpaid working time), which is possible only with the GSOEP. Significant effects occurred only in 2017 and 2019 (Bachmann et al. 2020, 2022).

Analyses of heterogeneous effects revealed stronger increases in hourly wages in eastern Germany than in western Germany in the short term (Bachmann et al. 2020; Ohlert 2022) and among full-time employees (ibid.; Burauel et al. 2018). In the medium term until 2019, however, the minimum wage effects on hourly wages no longer varied between western and eastern Germany or by type of employment (Bachmann et al. 2022). Further studies evaluated differences in the minimum wage effects by gender. According to the SES/ES, the minimum wage effects on the average hourly wages of women and men in minimum wage establishments differed by 3.6 % points in 2015, which led to a reduction in the gender pay gap in these workplaces (Ohlert 2023). A comparison of regions that were more or less affected by the minimum wage using the 2014 and 2018 SESs showed a decrease in the mean gender pay gap of 2.3 % points in regions more affected by the minimum wage (Caliendo and Wittbrodt 2022). At the lower end of the wage distribution, the gender pay gap declined more strongly than at the mean, namely, by 3.4 (25th percentile) and by 4.6 (10th percentile) percentage points (Caliendo and Wittbrodt 2022). A differentiation of short-term minimum wage effects by gender based on the GSOEP revealed significant wage increases for women but not for men in 2015 and 2016 and significant wage increases for men but not for women in 2017 (Bachmann et al. 2020). In a later study based on the GSOEP, Bachmann et al. (2022: 75ff.), did not find significant minimum wage effects on hourly wages in the subgroups of women and men in the period from 2015 to 2019.

In terms of living conditions and social security, monthly wages are more relevant for employees than hourly wages are. When the minimum wage increases, monthly wages may increase, remain constant, or decrease depending on changes in hours worked. Empirical findings on monthly wages based on the GSOEP, the IEB, the SES/ES and the IAB Establishment Panel are presented in the right four columns of Table 1. Causal studies based on the GSOEP provide mixed results: While Burauel et al. (2018) could determine an effect of 6.6 percent on monthly wages in the short run up to 2016, Bachmann et al. (2020, 2022; Caliendo et al. (2023b) did not find any statistically significant effects of the introduction of the minimum wage in 2015 or of the minimum wage increases up until 2019. The latter result also applied to employee subgroups. Against the background of the positive minimum wage effects on actual hourly wages, the zero effect on monthly wages indicates that the weekly working hours of minimum wage employees may have been reduced. However, on the basis of the IEB, distinctly positive minimum wage effects on monthly wages were detected (Bossler and Schank 2023). Thus, a 10-percentage-point increase in the applicability of the minimum wage caused an increase in monthly wages of approximately 4.4 percent in 2015 and 2016 and approximately 5.4 percent in 2017. Based on the IAB EP, the average gross wage sum per employee in companies affected by the introduction of the minimum wage grew by 3.8–6.3 percent more in 2015 than in unaffected companies (Bossler and Gerner 2020). Using the same data, Bossler et al. (2022: 41) found significant minimum wage effects of between 4.3 and 6.6 percent in all years 2015–2020. In the short term until 2015, Ohlert (2022) revealed an increase in monthly wages of approximately 3.0 percent on average and of 7.9 percent for low-wage workers in minimum wage establishments using the SES/ES. The effects on monthly wages are therefore stronger in studies that are based on firm data and that measure wage growth as a dependent variable. Regarding the adjustments of the minimum wage, Bachmann et al. (2022) determined a significant decline in monthly earnings of 8.3 percent in 2018 based on the GSOEP. Bossler et al. (2022), in contrast, found a growth of 1.8 percent based on the IAB EP. However, they revealed later declines of 2 and 3.8 percent as a result of the second and third increases in the minimum wage, respectively. Both Bachmann et al. (2022) and Bossler et al. (2022) explained the respective declines in monthly wages with a lower increase in the minimum wage compared to average wages during this period.

There is evidence on the relationship between the minimum wage and collective bargaining negotiations in low-wage industries from a qualitative study (Bispinck et al. 2023). By examining the period from 2020 to 2022, the study found that the minimum wage increase to 12 euros per hour posed a particular challenge for collective bargaining. Thus, collectively agreed wages were threatened to be overtaken in many low-wage sectors. According to an analysis of 564 collective agreements available to the Federal Statistical Office as of 21 November 2022, there were still a total of 180 sectoral and company collective agreements containing at least one pay group with gross hourly wages of less than 12 euros per hour. To avoid being overtaken by the minimum wage, the collective bargaining parties in almost all of the sectors examined in the study adjusted the collectively agreed wages accordingly. In some cases, the schedule of collective bargaining was even brought forward. The minimum wage-induced adjustments to collective pay scales led to above-average wage increases at the lowest pay scales. To a lesser extent, higher pay scales were also raised. Thus, the adjustment to the minimum wage has led to a significant increase in the level of collectively agreed wages in low-wage sectors.

4.3 Working Time

Reducing working hours can be a measure taken by companies to lower wage costs that have increased as a result of the minimum wage. Adjustments in working hours can thus also be seen as a way for firms to adjust employment. On the other hand, employees may also react to a minimum wage-induced increase in hourly wages by reducing or expanding their working hours (Bachmann et al. 2022: 115). Due to mixed evaluation results regarding the scope and persistence of these effects, there has been a lively debate about the relevance of minimum wage effects on working hours in Germany. Our literature survey shows that existing studies largely find reductions in working time, particularly directly after the introduction and the first increase in the minimum wage.

For the most recent years, only descriptive evidence on the working time of minimum wage workers is available. Due to data collection problems during the pandemic (see Section 3.1), the results for 2020 are particularly scarce. The results from the “coronavirus high-frequency online personal panel” (HOPP) survey showed that the percentage reduction in hours worked per week in May 2020, compared to the time before the pandemic, was significantly greater for minimum wage employees than for higher-paid employees (Jaenichen 2021). This result reflects the relatively strong impact of the pandemic on low-wage workers. According to the Earnings Survey from April 2022, the number of paid working hours for minimum wage workers was still lower than that in 2019, with 37.5 h for full-time employees, 20.4 h for part-time employees and 7.7 h for those in marginal employment (Mindestlohnkommission 2023: 136).

Causal studies on minimum wage effects for the years 2015–2019 consistently identified a reduction in contractual working hours directly after the introduction of the minimum wage in 2015 (see Table 2 and Bachmann et al. 2020: 118f.; Bonin et al. 2018: 92ff.; Bossler and Gerner 2020; Ohlert 2022; Pusch, Seifert, and Santoro 2020). Note that the scope of absolute changes in working hours differs strongly between studies and by research design. For example, Bachmann et al. (2020) reported for the year 2015 that contractual working time was on average reduced by 9 min per week in regions with a higher minimum wage bite (by one standard deviation). For the same year, Bossler and Gerner (2020) noted a decrease in average contracted weekly working hours in minimum wage establishments of 0.22 h (13 min) compared to establishments without minimum wage employees. Burauel et al. (2020) revealed an average reduction in weekly working hours of 1.7 h in 2015 for employees with hourly wages less than 8.50 euros compared to employees with higher wages. Bachmann et al. (2022) and Ohlert (2022) showed that the measured working time effects were greater for low-wage workers than for average workers in regions or firms.

For later years, the findings differ between studies that measure the bite of the minimum wage at the individual level and those that measure the bite at the regional or the firm level. Focussing on employees who earned less than the minimum wage before its introduction, Bachmann et al. (2020, 2022 did not find effects of the introduction of the minimum wage on working time in 2016 or in later years until 2019. For employees affected by subsequent increases in the minimum wage, Bachmann et al. (2022: 132ff.) did reveal significant reductions in working hours in 2017 and 2018 of approximately 14.4 percent and 17.8 percent, respectively, but not in 2019.

By comparing regions with a higher minimum wage bite and regions with a lower minimum wage bite, Bachmann et al. (2020, 2022; Caliendo et al. (2023b) detected negative effects on contractual working time each year since 2015 using the GSOEP. Differentiation of working time effects with this approach pointed to stronger reductions in working time for part-time employees and marginal employees among women (in 2018 and 2019) and in the lower 40 percent of the distribution of monthly earnings (Bachmann et al. 2022: 137f.). Biewen, Fitzenberger, and Rümmele (2022) also measured the minimum wage bite at the regional level using the Structure of Earnings Survey in 2014 and 2018 and found no minimum wage effects on paid working time. Bossler and Gerner (2020) examined average working time in establishments affected by the minimum wage compared to that in other establishments. They revealed a working time effect of −0.4 percent in 2015 and no significant effect in 2016. Ohlert (2022) compared the change in paid working time of employees in minimum wage establishments to employees in other establishments. Thus, working time significantly decreased by approximately 3 percent on average and by 6 percent for low-wage employees in 2015. The average working time reduction was smaller among women than among men.

Regarding actual working time, no statistically significant minimum wage effect was found for 2015 using a treatment definition based on individual wages (Bonin et al. 2018: 92ff.). The authors concluded that the introduction of the minimum wage could have led to a substitution of agreed working time with overtime. However, Bachmann et al. (2020); Caliendo et al. (2023b): 116ff.) and Bachmann et al. (2022: 131), identified even somewhat stronger declines in actual working time than in contractual working time based on a regional approach. This suggests a decrease over time among minimum wage employees.

4.4 Noncompliance with the Minimum Wage

The minimum wage is effective only if the provisions of the Minimum Wage Act are complied with and if the minimum wage is actually paid. However, deficits in compliance with the statutory minimum wage have been observed. Violations of the statutory minimum wage are in most cases associated with the failure to record or with misrecording of actual working hours. Information on hourly wages below the minimum wage obtained from the SES/ES, which is a survey of employers, differs significantly from that obtained from the household survey conducted by the GSOEP. However, importantly, neither survey is designed to determine the degree of noncompliance with the Minimum Wage Act in terms of their objectives nor the specific information requested. Previous studies on measurement errors have concluded that there are systematic differences between the two surveys. These can be attributed to the respective survey designs, to typical measurement errors, such as the rounding behaviour of respondents, and to the so-called mean reversion (Bachmann et al. 2020: 76ff.; Dütsch, Himmelreicher, and Ohlert 2019). There are also findings on the problem of incentives with respect to employer-reported noncompliance. Since paying wages below the minimum wage is an offence, employers may not want to report such low wages and adjust their data before reporting (Garnero, Kampelmann, and Rycx 2015). This leads to differences in monthly wages, weekly working hours and gross hourly wages, especially at the lower end of the respective distribution between the SES/ES and the GSOEP.

Accordingly, the ES reported approximately 1.0 million employment relationships below the minimum wage in 2015 and approximately 750 thousand in 2016 (Figure 3). In terms of all employment relationships, this resulted in shares of 2.8 percent and 2.1 percent. According to the GSOEP, a significantly larger group of employees earned less than 8.50 euros per hour after the introduction of the minimum wage. In 2015 and 2016, the GSOEP reported 2 million and 1.8 million employees, respectively, who earned less than the minimum wage when contractual working hours were examined (Burauel et al. 2017). In 2015, this corresponded to a share of 8.2 percent, and in 2016, it corresponded to a share of 7.0 percent of the population of approximately 26.2 million employees. In the following years, the figures for noncompliance fell somewhat, but in the GSOEP, they were still considerably greater than those in the SES/ES. In April 2022, on the basis of the ES, there were approximately 798 thousand employment relationships and thus a share of 2.1 percent with hourly wages below the statutory minimum wage of 9.82 euros. For 2022, no figures are yet available from the GSOEP.

Figure 3:

Development of minimum wage noncompliance over time. Source: Structure of Earnings Survey (SES) 2018, Earnings Surveys (ES) 2015, 2016, 2017, 2019, 2022.

For 2022, the monthly development of employment with hourly wages below the statutory minimum wage is available based on data from the ES (Figure 3). The number of jobs below the minimum wage was relatively high in the months of January, July and October, during which the minimum wage increased, and decreased quickly in the following months. The pattern indicates that the implementation of the minimum wage in companies is still incomplete immediately after an adjustment and increases over time. The measures in 2018 and 2019 were taken at a time when the respective new minimum wage levels had already been in effect for 16 and 4 months, respectively, and the companies had accordingly had time to implement them. Thus, part of the noncompliance with the minimum wage is a transitional phenomenon and can be traced to delays in its implementation.

4.5 Employment and Unemployment

The second evaluation criterion mentioned in the Minimum Wage Act is that jeopardizing employment should be avoided. Descriptive evidence on selective employment indicators will be presented first. Causal analyses on the effects of the minimum wage on employment will be subsequently discussed.

In 2015 and 2016, after the introduction of the minimum wage, employment grew more strongly in minimum wage sectors than in the rest of the economy. This was also true for western and eastern Germany (Figure 4). This development reversed in 2017 and 2018, when employment in the rest of the economy increased more strongly than did employment in minimum wage sectors. As a result of the measures taken to control the coronavirus pandemic, total employment decreased significantly beginning in the second quarter of 2020 in both parts of the country. There was an employment decline, particularly in the minimum wage sectors. This is because the minimum wage sectors were also those most affected by lockdown measures, for example, through the closure of restaurants, bars and retail shops. Accordingly, the number of employees in short-time work, which was the most important labour market policy measure during the coronavirus pandemic, increased sharply.^[5] The proportion of employees receiving short-time benefits was greater in minimum wage sectors than in non–minimum wage sectors. Employment in the minimum wage sectors grew again and developed more dynamically than did employment in the non–minimum wage sectors from the fourth quarter of 2021 until the second quarter of 2022 (Figure 4). The reduction in employment in the minimum wage sectors during the pandemic was driven mainly by a decline in marginal employment (i.e. employment largely exempted from social security contributions), as only regular employees can receive short-time benefits. The subsequent strong employment growth after the pandemic, on the other hand, was due mainly to an increase in regular employment (i.e. employment subject to social security contributions). Empirically, it is non-trivial to distinguish whether differences between sectors during the COVID-19 pandemic were caused partly by the minimum wage or solely by the pandemic. The positive development of employment after the pandemic in sectors highly affected by the minimum wage suggests the latter. In the causal studies listed below, indicators of the pandemic were used to separate the effects of the pandemic and the minimum wage.

Figure 4:

Development of total employment. Source: Statistics of the federal employment agency, own calculations.

Numerous causal analyses are available on the effects of the statutory minimum wage on employment. These studies investigate different time horizons from their introduction in 2015 and 2016 to subsequent increases and up to January 2022 (Table 3). To a certain extent, the analyses apply different identification methods, use different databases and examine different outcome variables. This is again indicated by the superscript letters and numbers.

For overall employment, which is made up of regular employment (i.e. employment subject to social security contributions) and marginal employment (i.e. employment largely exempt from social security contributions), the coefficients from the studies, by and large, show a small negative effect of the introduction of the minimum wage. According to calculations by Börschlein and Bossler (2019), the absolute employment effects of the minimum wage on total employment across various studies ranged from a gain of approximately 11,000 jobs to a loss of approximately 200,000 jobs. Caliendo et al. (2018) found a decline of 0.025 percent in employment for every additional percentage point in the share of minimum wage workers in a given travel to work area in 2015, the year of the minimum wage introduction. Bossler and Schank (2023) followed a similar identification strategy to that of Caliendo et al. (2018) and identified no effect on overall employment in the following year 2016. According to Bonin et al. (2018) and Pestel et al. (2020), the introduction of the minimum wage reduced overall employment by 0.6 percent in 2016 and by 0.9 percent in 2019 in regions with an above median wage gap (i.e. the difference between the actual wage in 2014 and the minimum wage) compared to regions with a below average wage gap. Caliendo, Olthaus, and Pestel (2022, 2023a) used the same identification strategy as Bonin et al. (2018) and Pestel et al. (2020) and revealed a 0.7 percent reduction in employment in the long run up until 2022 as a result of the minimum wage introduction. These negative employment effects were particularly driven by regions with relatively low GDP growth before the introduction of the minimum wage. The coefficients were somewhat larger if the unit of analysis was the firm rather than the region. This reflects the fact that transitions of employees to other firms in the same region are not necessarily accounted for if minimum wage effects are measured at the firm level. This is the case if employees change from minimum wage firms to non-minimum wage firms within the same region as a result of the minimum wage. Firm-level analyses measure this as a minimum wage-driven employment loss, whereas in regional analyses, the overall net sum of employment changes within the region constitutes the minimum wage effect. Bossler et al. (2018, 2020, 2022 compared firms with at least one minimum wage worker with firms without minimum wage workers and examined a lower employment level of approximately 1.5 percent in the former compared to the latter in 2015 as a result of the introduction of the minimum wage. This effect increased gradually until the year 2022 to 6.7 percent lower employment in firms with at least one minimum wage worker. Dustmann et al. (2022) looked at workers paid below the minimum wage before its introduction and, by using a different outcome variable than the other studies, identified a slightly greater probability of them being employed after the minimum wage had come into force. The authors also observed a reallocation of these workers to larger, higher paying firms due to the minimum wage.

This difference in effect sizes depending on the unit of analysis is also visible with respect to subsequent increases to the minimum wage. According to the studies of Caliendo, Olthaus, and Pestel (2022, 2023a), an increase in 2019 had a negative effect on overall employment of 0.8–0.9 percent in regions with an above-median wage gap. For increases in other years, the authors did not identify any effect on employment. According to Bossler, Gürtzgen, and Börschlein (2020, 2022, the increase in 2017 reduced employment in affected firms by 2.3 percent. The increases in 2019 and 2020 did not affect employment in firms with minimum wage workers.

The impact on overall employment was primarily driven by the minimum wage’s effect on marginal employment. Regular employment was not affected. Several studies have identified small positive or negative effects on regular employment immediately after the minimum wage was introduced, but these effects vanished over the longer run. For marginal employment, all studies showed a reduction as a result of the minimum wage introduction and as a result of most subsequent increases. Effect sizes varied with the unit of analysis. Isphording et al. (2022) looked at the decline in marginal employment in more detail. According to the authors, the decline was primarily driven by a significant decline in the hiring rate for this type of employment; it was not due to an increased exit rate, i.e. dismissals or layoffs. Numerous marginal jobs were upgraded to regular employment as a result of the minimum wage introduction (vom Berge et al. 2016; Bossler and Schank 2023).

Regarding unemployment, no study has identified any minimum wage effects thus far (Bonin et al. 2018; Caliendo, Olthaus, and Pestel 2022, 2023a; Pestel et al. 2020). For the development of unemployment during the coronavirus pandemic from the second quarter of 2020 onwards, there were also no indications of a stronger increase in unemployment in regions with a high minimum wage and a high incidence of coronavirus than in regions with a lower incidence (Caliendo, Olthaus, and Pestel 2023a).

4.6 Companies Affected by the Minimum Wage

The third evaluation criterion mentioned in the Minimum Wage Act concerns the impact of the minimum wage on competition conditions. Accordingly, the minimum wage should contribute to fair and functioning market conditions by counteracting cutthroat competition through wage costs and maintaining firms’ competitiveness. Competition between companies should take place on the grounds of service and product quality rather than through a race to the bottom on wages.

In the period from 2015 to 2020, the proportion of firms affected by the minimum wage decreased continuously, according to the IAB Establishment Panel. Before the introduction of the minimum wage, in 2014, approximately 12 percent of companies had at least one employee with an hourly wage less than 8.50 euros (Bossler et al. 2022: 16 ff.). For the increases in the statutory minimum wage in 2017, 2019 and 2020, the proportions were approximately 8.5 percent, 6.9 percent and approximately 6 percent, respectively (Hohendanner 2022: 12). In January 2021, this still applied to approximately 6 percent of companies (ibid.). For the firms for which the minimum wage uprating at the beginning of 2020 was relevant, approximately 28 percent of employees previously earned hourly wages below the minimum wage level of 9.35 euros (Hohendanner 2022: 13). As a result of the increase in the minimum wage by the Minimum Wage Commission to 10.45 euros as of July 2022, 6 percent of companies were affected. The proportion of affected companies after the intervention of the government to raise the minimum wage to 12 euros increased to 23 percent.

4.7 Firm Competitiveness

In macroeconomic terms, the influence of the minimum wage on the total wage bill was relatively small. The introduction of the minimum wage caused an increase in the gross monthly wage bill of 431 million euros and in the annual gross wage bill of 5.2 billion euros in 2015 under the assumption of full implementation of the statutory minimum wage and unchanged working hours (Statistisches Bundesamt 2016). In relation to all gross wages, this corresponded to an increase of 0.43 percent. The effects of the minimum wage adjustments on the wage bill from 2017 to 2019 were comparatively small, at 0.07 percent and 0.06 percent (Kann 2018: 54; Statistisches Bundesamt 2017: 24). This also applied to the adjustment of the minimum wage to 9.35 euros on 1 January 2020, with a roughly estimated increase in the wage bill of approximately 360 million euros or 0.02 percent. However, the increase in the minimum wage to 12 euros by parliament had a similarly high impact on the wage bill as the introduction of the minimum wage in 2015. It amounted to approximately 480 million euros or 0.35 percent per month (Mindestlohnkommission 2023).^[6]

Most recently, Russia’s war against Ukraine, which began in February 2022, placed considerable strain on the entire German economy and on the competitive situation of minimum wage firms in particular. Almost half of the minimum wage firms, i.e. those that had employees with an hourly wage of less than 12 euros, stated that the war had a predominantly negative impact on them (Brunner, Gloger, and Hohendanner 2023). A smaller proportion of firms not affected by the minimum wage mentioned this (43 percent). However, firms not affected by the minimum wage were more likely to say that the war had no impact on them (39 percent versus 29 percent). Among the firms that reported a negative impact of the war in Ukraine, the specific consequences were similar for those affected and not affected by the minimum wage (Mindestlohnkommission 2023: 165). Approximately 94 percent of the minimum wage companies and 92 percent of the other companies were moderately to strongly affected by higher energy and fuel costs. At approximately 82 percent, a slightly greater proportion of minimum wage companies than of other companies (75 percent) reported facing higher costs for inputs or raw materials. Difficulties with suppliers or logistics, as well as liquidity bottlenecks, were also mentioned more frequently by minimum wage–affected companies than by other companies as effects of the war in Ukraine. Slightly more than 60 percent of the minimum wage companies and the other companies had difficulties obtaining inputs or raw materials. Other effects of the war were less significant.

In 2020 and 2021, the coronavirus pandemic and the associated restrictions to contain the pandemic, such as temporary closures of shops and restaurants, had strong economic effects and consequences for companies. Firms employing minimum wage workers were more affected by the coronavirus pandemic and suffered more negative effects from it than other companies (Börschlein and Bossler 2021; Hohendanner 2022; Kagerl and Ohlert 2021). This was largely because companies affected by the minimum wage are overrepresented in those sectors of the economy that were severely restricted by the pandemic or by the measures to contain it. This applies in particular to hotels and restaurants, personal services such as hairdressing and the retail trade. The most frequently reported negative consequences of the pandemic were a decrease in demand or a decrease in turnover and increased costs due to hygiene measures and difficulties obtaining inputs (Kagerl and Ohlert 2021). Therefore, compared with other companies, firms affected by the minimum wage more frequently took personnel policy measures to respond to the pandemic, such as short-time work, reductions in working hours, not filling vacancies and reducing fixed-term employment (Mindestlohnkommission 2023: 163). Wage increases and special payments were also postponed more frequently in minimum wage firms than in other firms (Kagerl and Ohlert 2021). Support measures provided by the government were used more frequently by firms affected by the minimum wage than by others. However, there was no statistically significant increase in the number of closures of firms affected by the minimum wage (Hohendanner 2022).

Causal analyses at the establishment level showed a minimum wage-induced increase in labour costs in companies affected by the minimum wage and thus confirmed the results on wage increases for employees affected by the minimum wage. On the basis of the IAB EP, the average wage costs (gross wage total) per employee in companies affected by the introduction of the minimum wage rose by 3 and 4 percent more in 2015 and 2016, respectively, than in companies not affected. In 2017 and 2018, the increase in wage costs for these companies was approximately 5 and 6 percent greater, respectively; in 2019 and 2020, it was approximately 6–7 percent greater (Bossler, Gürtzgen, and Börschlein 2020: 24ff.; Bossler et al. 2022: 41ff.). The effects on wage costs were stronger for companies in eastern Germany than for those in western Germany (Bossler et al. 2018: 94). For the minimum wage increase in 2017, there was a lagged effect of 1.8 percent on wage costs in 2018 (Bossler, Gürtzgen, and Börschlein 2020: 25). In contrast, the increases in 2019 and 2020 induced negative effects of 2 percent and 4 percent, respectively (Bossler et al. 2022). This finding indicates that the minimum wage adjustments in 2019 and 2020 did not lead to a significant wage increase and that the development of the affected companies even lagged behind general wage development.

Thus far, there have been no effects on business or macroeconomic labour productivity. At the company and individual levels, there are numerous reasons why the minimum wage could trigger changes in productivity. It is to be expected that companies affected by the minimum wage try to compensate at least partially for increased wage costs due to the minimum wage by increasing productivity (Bossler, Gürtzgen, and Börschlein 2020: 81 ff.; Bossler et al. 2022: 63ff.; Koch et al. 2020: 92 ff.; Riley and Bondibene 2017). To this end, companies could replace labour with capital, invest more in training, hire more productive workers, improve their organization or adjust their range of services. In addition, higher pay could lead to greater motivation among employees.

All the existing studies did not find evidence for minimum wage-induced effects on labour productivity in Germany, which is usually measured as revenue per employee (Bossler et al. 2018: 81ff., 2020: 45ff. 2022: 63ff.; De Monte et al. 2022: 104ff.). Only in the case of companies in western Germany has a small negative productivity effect of the minimum wage increases been revealed (Bossler et al. 2018: 81ff., 2020: 45ff., 2022: 63ff.). An extended estimate of the production function for the input factors labour and capital as well as total factor productivity also did not indicate any effects of the introduction of the minimum wage or the first minimum wage increase. Only the second minimum wage increase caused a slight rise in total factor productivity, while the contribution of the production factors labour and capital to the output of establishments fell slightly (ibid.). Dustmann et al. (2022) further noted that employees affected by the minimum wage move to more productive companies as a result of the introduction of the minimum wage. Companies’ adjustments to the minimum wage in terms of wages and operational processes can have effects on employees’ individual productivity. In this respect, positive effects of the minimum wage on satisfaction with pay were found (Bossler et al. 2022; Gülal and Ayaita 2020). Bachmann et al. (2020), on the other hand, did not identify any statistically significant minimum wage effects on the job satisfaction of employees in the bottom 40 percent of the wage distribution. However, they detected a negative effect for employees with earnings just above the minimum wage.

Another aspect of competition is investment. Research shows that the introduction of the minimum wage had a short-term negative impact on investments but no longer-lasting negative effects (Bossler, Gürtzgen, and Börschlein 2020: 63ff.; Bossler et al. 2022: 88ff.). Total investment in companies affected by the minimum wage decreased by approximately 40 percent in 2015 in comparison to that in unaffected companies but did not further decrease after the minimum wage increases in the period from 2017 to 2019. Obviously, companies affected by the minimum wage withheld investments as an immediate reaction to the introduction of the minimum wage, while investment behaviour in later years was no longer influenced by the minimum wage.

Furthermore, according to the studies by Bossler et al. (2020, 2022), profits fell due to the introduction of the minimum wage. In the period from 2015 to 2019, the introduction of the minimum wage led to a reduction in profitability of approximately 6.6 percent and just under 9 percent in affected companies (Bossler et al. 2018: 97f.; Bossler, Gürtzgen, and Börschlein 2020: 59; Bossler et al. 2022: 76ff.). This finding can be explained by the fact that personnel costs increased due to the minimum wage, while productivity did not change. The decline in profits due to the introduction of the minimum wage was greater in 2016 than in 2015. In a differentiated estimation, the effect was confirmed only for eastern Germany, not for western Germany, and only for companies with high competitive pressure, not for companies without it. In contrast, the increases in the minimum wage in 2017 and 2019 had no statistically significant effects on business profitability.

The introduction and increases of the minimum wage may have influenced company start-ups and closures and hence the intensity of competition between businesses. Overall, company deregistrations and insolvency proceedings have declined continuously since 2015 (Mindestlohnkommission 2023: 195). The trends in company deregistrations and insolvencies in minimum wage sectors were similar to those in the economy overall. Findings from causal studies suggest at most moderate effects of the minimum wage on company density and the market entry rates of companies. However, various causal studies point to microbusiness closures due to the minimum wage. According to the Mannheim Business Panel, a slight reduction in the number of companies resulted from the introduction of the minimum wage, but no impact on company density was found (De Monte et al. 2022). An increase in the minimum wage in 2017 did not have an independent effect on the number of companies or company density. A separate analysis of overall market entry and exit rates at the regional level did not suggest any minimum wage effects. However, a subdivision by size class revealed a minimum wage-induced increase in market exits among microbusinesses with up to four dependent employees. These findings are consistent with the results of Dustmann et al. (2022) and Bossler et al. (2022: 148ff.), who also identified an increase in market exits by microbusinesses due to the introduction of the minimum wage. In addition, the average size of companies in regions more affected by the minimum wage increased as employees earning less than 8.50 euros per hour moved from microbusinesses to larger companies. Thus, there were changes in the size structure of companies because of the introduction of the minimum wage. On the basis of analyses of data based on the IEB, Isphording et al. (2022: 74ff.) were unable to determine any minimum wage effects on the closure of companies – either overall or for small companies.