The Minimum Wage Affects Them All: Evidence on Employment Spillovers in the Roofing Sector

Most minimum wage research focuses on the average employment effect that minimum wages exert on workers with a binding minimum wage, i.e. workers whose wage has to be raised in order to comply with the minimum wage level. However, depending on the production technology, the minimum wage may also affect workers for whom the minimum wage is not binding. The existing literature mainly discusses such employment spillovers as a potential source of bias.

This paper contributes to this sparse literature on employment spillovers on minimum wages by exploiting the minimum wage introduction and subsequent increases in the German roofing sector. With a ratio of the minimum wage level and the median of around 1 in Eastern Germany, the bite has to be considered exceptional even by international standards. Therefore, the German roofing sector serves as an ideal setting to study employment effects along the entire wage distribution. In particular, we look at the chances of remaining employed in the roofing sector for workers with and without a binding minimum wage and use the plumbing sector, which is not subject to a minimum wage, as a benchmark sector. By estimating the counterfactual wage plumbers would receive in the roofing sector given their characteristics, we are able to identify employment effects along the entire wage distribution.

The findings indicate that the chances of remaining employed in the roofing sector have deteriorated due to the minimum wage introduction, especially in Eastern Germany where the bite of the minimum wage was particularly hard. However, the impact suggested by comparing workers with and without a binding minimum wage appears to be underestimated in the intersectoral comparison, thus hinting at employment spillovers. Moreover, an intersectoral comparison suggests negative employment outcomes for East German workers along the entire wage distribution. According to personal interviews with sector insiders, capital-labour substitution rather than scale effects drive this finding.

These findings on the impact of the minimum wage regulations on the chances of continued employment should not, however, be equated with the overall minimum wage impact since, for instance, single-person companies are not accounted for by our analysis. Furthermore, given the specific conditions of the roofing sector, a transferability of the results to other sectors has to be viewed with caution. Despite these reservations, the presented evidence clearly highlights the need for a broader perspective on employment effects of minimum wages by also taking a closer look at workers who do not appear to be affected by the minimum wage at a first glance. Moreover, our results put doubts on any attempt to identify employment effects of minimum wages by comparing workers with and without a binding minimum wage within a covered sector.

Aretz, Bodo, Melanie Arntz and Terry Gregory (2012), The Minimum Wage Affects Them All: Evidence on Employment Spillovers in the Roofing Sector, ZEW Discussion Paper No. 12-061, Mannheim.