IFS Seminar presented by Alexandra Fedorets (DIW)

Alexandra Fedorets

Post Doctoral Researcher at DIW

Abstract:  
The introduction of a federal minimum wage in 2015 created a profound wage shock on the German labor market. We exploit the variation of this treatment across regions and different employees to estimate its impact on labor earnings and employment, in particular, by different degrees of labor-capital substitutability. We use a large-scale panel survey and augment it with information on labor-capital substitution. We can show that the impact of this large wage shock on the overall employment is negligible. Yet, when the treatment is interacted with the substitutability of labor, we find statistically significant negative effects on the probability of remaining employed and a significantly higher unemployment risk for those employees who are more easily replaced by capital as production factor. We find this pattern to be consistent for alternative measures of substitutability as well as alternative specifications of the model. The fact that employers seem to cut primarily replaceable jobs provides valuable insights for targeted policies supporting those employees with the highest labor market risks following an introduction or increase of a minimum wage.