Employment expectations and uncertainties ahead of the new German minimum wage
| Author | Mario Bossler |
| Date | 01 September 2017 |
| Published date | 01 September 2017 |
| DOI | http://doi.org/10.1111/sjpe.12127 |
EMPLOYMENT EXPECTATIONS AND
UNCERTAINTIES AHEAD OF THE NEW
GERMAN MINIMUM WAGE
Mario Bossler*
ABSTRACT
This article analyzes announcement effects of the new statutory minimum wage
on employment expectations and uncertainties in Germany. Using a difference-
in-differences approach applied to the IAB Establishment Panel, employers
affected by the minimum wage show an increased employment uncertainty and a
0.9% points drop in their expected employment growth. Using the same identifi-
cation strategy with data from 2015, the treatment effect on actual employment
growth of affected employers matches the employers’ expectation. Hence, an
analysis of employer expectations seems to be promising to detect employment
effects of policy changes before they come into force.
II
NTRODUCTION
In Germany, a new statutory minimum wage of €8.50 per hour of work came
into force on 1 January 2015. The relevance of the minimum wage legislation
draws on its generality. A high establishment-level bite in the extensive and
intensive margin creates a severe wage setting restriction (Bellmann et al.,
2015), which could result in severe employment losses. Even though potential
employment effects were heavily debated in advance and have been extensively
analyzed for other countries,
1
such employment effects are ultimately an
empirical question, and prominent economists argue in favor of independent
scientific ex-post evaluations (e.g. M€
oller, 2014; Zimmermann, 2014). Corre-
sponding to this claim, I provide a first approach by analyzing how the mini-
mum wage affected the employers’ employment expectations and uncertainties
after the law was announced but before it came into force.
The relevance of analyzing the employers’ expectations draws on the possi-
bility to infer the consequences of minimum wages already at a point in time
when true consequences have not been revealed. Moreover, the size of poten-
tial negative externalities was heavily debated in the fall of 2014 when the law
was approved but not in force. Predictions of simulations based on theoretical
*Institute for Employment Research (IAB), Nuremberg
1
For surveys on this topic, see Neumark and Wascher (2006) or Schmitt (2015).
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12127, Vol. 64, No. 4, September 2017
©2017 Scottish Economic Society.
327
assumptions raised the possibility of severe disemployment effects (Knabe
et al., 2014), which also led to a pessimistic prediction by German Council of
Economic Experts in its yearly report (Sachverst€
andigenrat, 2014). Similar dis-
cussions are currently ongoing in the UK, where the consequences of the
introduction of the new National Living Wage, which is an effective rise in
the minimum wage from £6.50 to £9 by 2020,
2
are widely discussed, and
even the initiating British government admitted a potential loss of 20,000 to
120,000 jobs.
Predicting employment effects from expectations without imposing assump-
tions from economic theory is tempting, as the empirical literature has mostly
shown much smaller disemployment effects than economists expected from
theoretical considerations. After analyzing causal micro-economic effects of
minimum wages in the Unites States for 25 years, the most recent evidence on
highly affected individuals (mostly teens) points at only small (Neumark et al.,
2014; Addison et al., 2015) or virtually zero (Dube et al., 2010) disemploy-
ment effects. Similar studies on minimum wages in the United Kingdom
(Machin et al., 2003; Dolton et al., 2015) and Germany (Bossler and Gerner,
2016) also point at fairly small disemployment elasticities. Compared with pre-
vious studies from the Unites States and United Kingdom, I analyze a mini-
mum wage introduction in a continental European country where institutional
settings differ substantially. Moreover, the analysis concerns a minimum wage
introduction, for which the bite is already high from the very beginning,
rather than analyzing incremental increases of already existing minimum wage
legislations.
To analyze the German minimum wage effect on employment expectations
and uncertainties, I apply a difference-in-differences analysis comparing a trea-
ted group of firms with a control group of unaffected firms. This approach
allows tracking changes of treated firms compared with untreated firms over
time while controlling for constant differences between these two groups. For
this respect, the IAB Establishment Panel allows distinguishing affected from
unaffected establishments with data from ahead of the minimum wage intro-
duction by asking each establishment for the number of employees that
receive an hourly wage below the announced minimum wage of €8.50. More-
over, the data include an independent employer assessment of the expected
employment growth, which may respond in the treatment year 2014, when the
law was announced but not in force. The survey information was collected
between June and September, which is a few month before the minimum wage
came into force. I estimate the response on the expected employment growth
but also on whether the employment growth is uncertain. Finally, I also ana-
lyze whether affected employers more likely report wage costs to become a
problem because this outcome variable provides insights on the source of the
expectations concerning employment adjustments. In an additional step, I use
the estimated effects on expectations from ahead of the minimum wage
2
The National Living Wage is binding to individuals with an age of at least 25 years,
whereas the former minimum wage is valid to individuals of age 21 and older.
328 MARIO BOSSLER
Scottish Journal of Political Economy
©2017 Scottish Economic Society
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