Minimum Wage Reduces Returns to Education in East Germany's Craft Sector

Since January 1, 2015, a cross-sectoral minimum wage takes effect in Germany. The consequences for the labour market can be estimated only in the long term. But we can draw some conclusions having a look at already existing sectoral minimum wages. The roofing trade sector already introduced a minimum wage in October 1997, which is currently EUR 11.85. A recent ZEW study on this subject shows that the introduction of a minimum wage indeed improves the situation of low-income earners, but, at the same time, it reduces the wage of qualified skilled workers - particularly in the new German states.

"We achieved our aim which was to average the different wages in the roofing trade sector by introducing a minimum wage in this specific sector. But the minimum wage resulted in decreasing real wages respectively stagnating nominal wages of craftsmen in this sector who had been well-paid so far, especially in East Germany," says Dr. Terry Gregory, author of the study and researcher at ZEW Research Department "Labour Markets, Human Resources and Social Policy". A result of this development: an increasing number of people working in roofing trade receive an income close to the minimum wage level. By now, more than half of the employed persons in the East German roofing trade sector receive the minimum wage.

ZEW study also shows that especially small enterprises in the trade sector do not pay increasing wages for higher-income earners. During regressions these companies have very limited adaptabilities like increases in price. For this reason, they try to keep labour costs as low as possible.

This defensive wage policy by the companies was only possible due to the low employment opportunities for specialist workers between 1994 and 2008 which was the period examined in the survey. Thus, during the wage bargaining the companies had a stronger position than skilled employees. "As a consequence of this policy the wage differences between the differently skilled groups decreased and returns to education in the craft sector might fall," explains Gregory. Obtaining a higher qualification as an employee is not attractive anymore, since the differences in income between skilled and non-skilled positions are small.

As a result, the study advises the minimum wage commission to consider carefully where defining the level of the cross-sectoral minimum wage. "We should consider especially the possible effects of wages and employment on skilled workers in the craft sector," warns the author of the study. Moreover, we need to take into account regional price differences – especially between East and West Germany –since they are the reason for significant differences of the minimum wage. "The size of a company also plays an important role, because smaller companies have more difficulties in coping with an increase of personnel costs than bigger ones," says Gregory. Finally, we should consider the form of employment as being a consequence of the minimum wage. The increasing number of one-person businesses in the roofing trade might be the result of poor working conditions for qualified employees.

Download the complete study at

http://ftp.zew.de/pub/zew-docs/dp/dp14133.pdf

For further information please contact

Terry Gregory, phone +49/621/1235-306, e-mail gregory@zew.de