The Effect of Minimum Wages on Labour Market Flows Evidence from Germany

Abstract

Using a linked employer-employee data set on the German construction industry, we analyse the effects of the introduction of minimum wages in this sector on labour market dynamics at the establishment level, i.e. turnover and churning flows, as well as accessions and separations and their underlying worker flows. The fact that minimum wages in Germany are sector-specific enables us to apply a between approach using other industries as control groups in a difference-in-differences framework. Furthermore, we use a within approach with high-wage workers as control group. While the within approach shows that the minimum wage reduced worker flows in East Germany, the between approach yields positive effect on labour market dynamics in West Germany. Our results can be explained by differences between East and West Germany with respect to the bite of the minimum wage, as well as the much higher prevalence of posted workers in West Germany. Furthermore, spillover effects to highwage workers are likely to have played a role in East Germany.