Price effects of minimum wage: A survey data analysis for the german construction sector

In this paper, the authors present a new approach to estimate the impact of minimum wages on the labor market in the construction sector of Germany. Instead of estimating the effect on employment directly, the analysis focuses on the induced change of prices. Classical economic theory predicts increasing employment due to minimum wage legislation only if the labor market is monopsonistic. An increase in employment should also lead to an excess supply and a decrease in prices on the respective goods market. Therefore, prices are a suitable variable if one wants to evaluate the consequences of the minimum wage. Using a monthly conducted firm level data set obtained from the Ifo Institute for Economic Research, the authors find that the minimum wage has quite different impacts in East and West Germany: In East Germany we found significant positive price effects which excludes the possibility of rising employment. Rather, the results indicate the existence of a competitive sector-specific labor market. In contrast, we cannot find any significant price reaction for West Germany. This finding suggests that the implemented minimum wage in West Germany is too low in comparison to the predominantly paid wages and is hence not binding.

Objectives: The majority of papers which address minimum wages focus on output and employment effects.  In our paper, we discuss - both theoretically and empirically - the price effects which emerge from minimum wages. Thereafter, we infer from measured price effects to likely employment effects.

Data/Methods: The paper combines standard tools of microeconomic analysis with a quasi-experimental difference-in-differences setting. The survey data were obtained from the Ifo Institute for Economic Research.

Results: The empirical analysis reveals positive and significant price effects of minimum wages for East Germany, while we cannot detect measurable effects for West Germany. Therefore, positive employment effects for East Germany can be excluded, whereas in West Germany the minimum wage does not seem to be binding. 

JEL Categories are:  J08, J38, J42, J48