Evaluating the Minimum-Wage Exemption of the Long-Term Unemployed in Germany

Abstract

The authors evaluate the exemption of long-term unemployed job seekers from Germany’s national minimum wage. Using linked survey and administrative micro data, they rely on a regression discontinuity design to identify the effects of the policy by comparing hiring rates, employment stability, and entry wages around the administrative threshold between short-term and long-term unemployment. They find that the exemption is very rarely used and that the minimum wage binds irrespective of past unemployment duration. While the minimum wage led to a relative rise in entry wages for the long-term unemployed compared to the short-term unemployed, the authors do not detect a relative deterioration in their employment prospects.

Editorial Essay: Introduction to a Special Collection on European Labor Markets in Flux: The German Experience

“…Second, Matthias Umkehrer and Philipp vom Berge (2020) analyze a specific aspect of the implementation of the German minimum wage, namely, that the law allowed firms an exemption if they hired people who had been long-term unemployed, defined as a duration of at least one year. The one-year cutoff allowed the authors to use a regression discontinuity design, in which one may infer that many factors (both measured and particularly unmeasured) other than the minimum wage can be effectively controlled near the regression discontinuity of 365 days of unemployment.…”