Can the German minimum wage alleviate poverty and income inequality? Evidence from observed data and simulated counterfactuals

This study provides ex-post evidence on the redistributive impact of the minimumwage on disposable household incomes in Germany. Although the reductionof income inequality and poverty were emphasized as policy goals of the of minimumwage introduction, the distributional literature for Germany has focusedon hourly wages and earnings or relied on ex-ante simulations. Since ‘natural'control groups are not available due to a nationwide introduction, this paper accumulatesdescriptive evidence. Based on data from the German Socio-EconomicPanel we analyze changes in wage and income inequality, poverty, and differentmechanisms that affect transmission from individual gross wage-rates to disposablehousehold incomes. The minimum wage is found to be an ineffective toolfor income redistribution. Increases at the bottom of the wage distribution do nottranslate into increases in disposable incomes of poor households because individualsaffected by the minimum wage do not live primarily in households at thebottom, but are spread across the income distribution. Thus, welfare dependenceis only marginally reduced. Additional simulations show that neither full compliance,nor substantial increases of the level would make the minimum wage moreeffective in reducing inequality and poverty