Minimum Wage – Burden on Young Companies Greater than Expected

The statutory minimum wage, which became binding in Germany on a national level in 2015, has proved to be a greater burden on young companies than previously expected. Besides the necessary wage adjustments, start-ups have also been struggling with additional bureaucratic requirements, such as time sheets and less flexibility regarding compensation schemes. As a result, young companies may suffer from negative effects. These are the findings of a survey among start-ups conducted by the Centre for European Economic Research (ZEW) within the framework of the Mannheim Start-up Panel.

As part of the survey, around 5,000 young companies founded between 2011 and 2014 were interviewed on the phone. The findings were then extrapolated to all of the approximately 313,700 businesses which were founded in the sectors covered by the Mannheim Start-up Panel during the survey period. With the aim of assessing the positive and negative effects of the statutory minimum wage, ZEW collected data on how the minimum wage has affected start-ups with employees in two survey waves: the first survey was issued six months before and the second survey six months after the minimum wage was introduced on 1 January 2015.

Young Businesses Underestimated the Impact of the Minimum Wage

Before the minimum wage became binding, around 11 per cent of the surveyed companies expected the regulation to have a negative effect on the company. After the minimum wage was introduced, however, the share of companies which claimed to have suffered from negative effects rose to approximately 28 per cent. Around 20 per cent of the respondents had to do wage adjustments, while 10 per cent have been subject to additional burdens associated with bureaucratic requirements, such as reporting obligations and time sheets. A considerable number of companies stated that they had encountered difficulties in recruiting interns, student assistants or temporary workers after the introduction of the minimum wage. The difference in the findings of the two survey waves shows that many start-ups had not been sufficiently informed about the implications of the minimum wage. It also indicates that many businesses had underestimated its impact on the flexibility of compensation schemes for temporary workers.

It is likely that the additional bureaucratic requirements and the statutory minimum wage will come to play a more significant role in the development of young companies. Firstly, many start-ups are yet to establish a specialised human resources department which is proficient in the implementation of specific HR policies, such as reporting obligations. To finance specialised departments, start-ups will have to invest resources which otherwise would have been spent on the development of the company. In addition, flexible and performance-based compensation schemes are particularly important for young businesses, since their turnovers often vary considerably. The limited flexibility associated with the minimum wage could cause new businesses to take a more cautious approach in implementing expansion plans. This development is particularly alarming, since economic policy-makers expect German start-ups to provide a special impetus for the long-term economic development in Germany.

For further information please contact

Jürgen Egeln, Telefon 0621/1235-176, E-Mail egeln@zew.de