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Would a Legal Minimum Wage Reduce Poverty? A Microsimulation Study for Germany

Discussion Papers 791, 32 S.

Kai-Uwe Müller, Viktor Steiner

2008. May.

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In view of rising wage inequality and increasing poverty, the introduction of a legal minimum wage has recently become an important policy issue in Germany. We analyze the distributional effects of the introduction of a nationwide legal minimum wage of € 7.5 per hour on the basis of a microsimulation model which accounts for the complex interactions between individual wages, the tax-benefit system and net household incomes. Simulation results show that the minimum wage would be ratherineffective in reducing poverty, even if it led to a substantial increase in hourly wages at the bottom of the wage distribution and had no negative employment effects. The ineffectiveness of a minimum wage in Germany is mainly due to the existing system of meanstested income support.

JEL-Classification: I32;H31;J32
Keywords: minimum wage, wage distribution, working poor, poverty reduction, microsimulation
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