Minimum Wages and Competition: The Case of the German Roofing Sector

In 1997, a minimum wage has been introduced in the German roofing sector which has been regularly increased since then. As a result, the share of workers for whom the minimum wage is binding increased steadily. In eastern Germany, this binding rate reached 60% by the mid 2000s, while workers in western Germany were less affected by the minimum wage. Against this background, the present paper investigates the effect of the minimum wage on competition in the roofing sector. Competition is measured by market entry, market exit and profits of firms active in the market. Our analysis is guided by the argument that the minimum wages may by used by established firms to raise rivals’ costs and prevent entry by potential competitors. Lower entry rates reduce price competition and may stabilise or even raise profits of established firms.

We analyse the effects of the minimum wage using a difference-in-differences framework, based on a firm panel data set that covers all firms in the roofing sector as well as in the plumbing sector -which serves as reference sector- from 1996 to 2010. Firm-level panel estimations are employed to identify wage effects on profits while panel estimations at the level of regional markets are used to capture likely effects on entries and exits. As the binding rate of the minimum wage is significantly different between eastern and western Germany, all models are estimated separately for the two regions. In addition, firms are separated into two groups, sole traders (i.e. firms not affected by the minimum wage since they do not employ workers) and firms with employees (which do employ workers).

Estimation results reveal that the minimum wage had no effects on competition in the roofing sector in western Germany while some evidence for the theory on raising rivals’ cost can be found for eastern Germany. In eastern Germany, both market entries and market exits of firms with employees were reduced by the minimum wage. At the same time, the minimum wage contributed to higher profits of established firms, obviously caused by the lower level of competition due to lower entry and exit rates. Interestingly, the minimum wage clearly favoured market entries by sole traders in eastern Germany, which may point to some type of evasion strategy since almost all newly entering sole traders refrained from employing workers at a later stage.

Kraft, Kornelius, Christian Rammer and Sandra Gottschalk (2012), Minimum Wages and Competition: The Case of the German Roofing Sector, ZEW Discussion Paper No. 12-083, Mannheim.