Macroeconomic Long-Run Effects of the German Minimum Wage when Labor Markets are Frictional

Abstract

This paper analyzes the introduction of the German minimum wage in 2015 in a structural model geared to quantitatively assess its long-run economic effects. We first employ a simple neoclassic model where wages equal their marginal product, then extend this model to two sector economy, and finally introduce search and matching frictions. Even though all model variants remain highly stylized, they yield quantitative insights on the importance of different mechanisms and channels through which minimum wages affect outcomes in the long run. In this framework, the minimum wage has a strong negative effect on employment. When sectors are differently affected by the minimum wage, sectoral relative price changes play an important quantitative role. Other labor market policies and institutions are important for the transmission of minimum wage policy on labor market market outcomes.

Comparing economic theories or: pluralism in economics and the need for a comparative approach to scientific research programmes

“…Within the standard economic paradigm of intertemporal exchange and its allocational perspective, setting a minimum wage above the market clearing level -and this is the only sensible setting, as a minimum wage below the market clearing level would be useless -will have to have negative employment effects. These effects may be smaller if we assume a labour market with imperfections (transaction cost and imperfect competition) rather than a 'perfect' labour market, yet the allocational distortion is unavoidable (see Braun et al 2020). Choosing, alternatively, a post-Keynesian paradigm based on nominal obligations and taking a macroeconomic perspective to determine the employment effect of minimum wages, the prediction based on a simple Z-D theory without any particular assumptions about 'employment market ' [19] frictions would be quite different: there is a high likelihood of minimum wages having not employment but rather price effects (see Heise and Pusch 2019).…”