Minimum Wages and their Alternatives: A Critical Assessment

Abstract

Do minimum wages reduce in-work poverty and wage inequality? Or can alternative policies do better? Germany suffers from high unemployment among low-skilled workers and rising wage dispersion at the lower end of the wage distribution. We analyse the impact on employment, wage inequality, public expenditure, and incomes of poor households of three different policy options currently being discussed in Germany: a statutory minimum wage, a combination of minimum wages and wage subsidies, and pure wage subsidies to low-paid workers. In doing so, we distinguish between perfectly competitive and monopsonistic labour markets. We find that a minimum wage of EUR 7.50 would cost between 410,000 and 840,000 low-paid jobs, increasing the fiscal burden, while only moderately raising the income of poor households. With pure wage subsidies, the government can always ensure more favourable employment effects. Combining a minimum wage with a wage subsidy turns out to be extremely costly and inferior to wage subsidies in all respects.