The Minimum Wage Affects Them All: Evidence on Employment Spillovers in the Roofing Sector

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Das Wichtigste in KürzeDer Großteil der Mindestlohnforschung beschäftigt sich mit den durchschnittlichen Beschäf- Non-technical summaryMost minimum wage research focuses on the average employment effect that minimum wages exert on workers with a binding minimum wage, i.e. workers whose wage has to be raised in order to comply with the minimum wage level. However, depending on the production technology, the minimum wage may also affect workers for whom the minimum wage is not binding. The existing literature mainly discusses such employment spillovers as a potential source of bias.This paper contributes to this sparse literature on employment spillovers on minimum wages by exploiting the minimum wage introduction and subsequent increases in the German roofing sector. With a ratio of the minimum wage level and the median of around 1 in Eastern Germany, the bite has to be considered exceptional even by international standards. Therefore, the German roofing sector serves as an ideal setting to study employment effects along the entire wage distribution. In particular, we look at the chances of remaining employed in the roofing sector for workers with and without a binding minimum wage and use the plumbing sector, which is not subject to a minimum wage, as a benchmark sector. By estimating the counterfactual wage plumbers would receive in the roofing sector given their characteristics, we are able to identify employment effects along the entire wage distribution.The findings indicate that the chances of remaining employed in the roofing sector have deteriorated due to the minimum wage introduction, especially in Eastern Germany where the bite of the minimum wage was particularly hard. However, the impact suggested by comparing workers with and without a binding minimum wage appears to be underestimated in the intersectoral comparison, thus hinting at employment spillovers. Moreover, an intersectoral comparison suggests negative employment outcomes for East German workers along the entire wage distribution. According to personal interviews with sector insiders, capital-labour substitution rather than scale effects drive this finding.These findings on the impact of the minimum wage regulations on the chances of continued employment should not, however, be equated with the overall minimum wage impact since, for instance, single-person companies are not accounted for by our analysis. Furthermore, given the specific conditions of the roofing sector, a transferability of ...

When the Minimum Wage Bites Back: Quantile Treatment Effects of a Sectoral Minimum Wage in Germany

“…Especially smaller firms with a limited influence on market prices (price-takes) and less possibilities for substituting labour by capital have limited the scope for wage increases among their skilled employees. However, wage restraints among highly paid workers then only became possible due to deteriorating employment chances also among upper-decile workers as suggested by the complementary study of Aretz et al (2013) and which may have increased the bargaining power of firms over still employed workers. As a result, wage differentiation and thus incentives for human capital investments have been shrinking in the sector.…”

“…Whereas these theories are well able to explain the phenomenon of positive wage spillovers, they do not by themselves provide a complete picture of distributional aspects of MWs. For instance, recent empirical studies for the German roofing sector find a strong wage compression not only at the lower but also at the upper tail of the wage distribution, thus suggesting negative wage spillovers on high-wage earners (Aretz et al, 2012(Aretz et al, , 2013. In particular, the descriptive findings suggest that workers in Eastern Germany with high earnings experienced deteriorating real wages in the aftermath of the policy reform (see Figure 1).…”

“…The finding indicates that within-group inequality has decreased at the lower rank, that is for workers with similar characteristics those at the lower part of the distribution (those with unfavourable unobserved characteristics) now earn more. It may however also be the result of a selection effect caused lay-offs of low-wage workers with poor unobserved characteristics as found by Aretz et al (2013). In contrast, for high wage earners, within-group inequality has not changed, meaning that workers with similar characteristics still earn similar relative wages.…”

“…The decreasing pay rewards for high-skilled roofers compared to plumbers in Eastern Germany might be the result of a lower demand for these workers as suggested by (Aretz et al, 2013). The authors argue in favour of the scale effect driven by higher overall labour costs that dominate the substitution effect or some capital-labour substitutions (see Section 2).…”

“…This mechanism might be explaining the deteriorating employment effects among skilled workers in the German roofing sector as suggested by Aretz et al (2013). The author investigate the employment chances of roofers along the wage distribution by comparing roofers with counterfactual outcomes of plumbers in a control group design.…”