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 minimum wage on disposable household incomes in Germany. Although the reduction of income inequality and poverty were emphasized as policy goals of the of minimum wage introduction, the distributional literature for Germany has focused on hourly wages and earnings or relied on ex-ante simulations. Since ‘natural’ control groups are not available due to a nationwide introduction, this paper accumulates descriptive evidence. Based on data from the German Socio-Economic Panel we analyze changes in wage and income inequality, poverty, and different mechanisms that affect transmission from individual gross wage-rates to disposable household incomes. The minimum wage is found to be an ineffective tool for income redistribution. Increases at the bottom of the wage distribution do not translate into increases in disposable incomes of poor households because individuals affected by the minimum wage do not live primarily in households at the bottom, but are spread across the income distribution. Thus, welfare dependence is only marginally reduced. Additional simulations show that neither full compliance, nor substantial increases of the level would make the minimum wage more effective in reducing inequality and poverty.