What if the federal minimum wage falls?
More gross, less net
Strange effects of the introduction of the minimum wage
The introduction of a statutory minimum wage was expected to destroy jobs. It is still unclear whether and, if so, to what extent this is the case. The data available so far do not allow any clear statements. However, the number of mini-jobs has decreased significantly without any - even remotely - compensating increase in the number of employees subject to social insurance contributions (for further effects of the minimum wage see Beck and Roth (2015), Neumann (2015) and Wirtschaftliche Freedom (2015)).
It was not expected that the introduction of the minimum wage could lower an employee's net wage or not increase the disposable income of a “beneficiary”. Examples of these effects are shown below. They only affect single people who are at least 23 years old and have no children. First of all, it is assumed that those affected would not be entitled to unemployment benefit II if they had no income from work - due to other income. It is then assumed that those affected would be in need of assistance if they were not in employment and would receive unemployment benefit II.
I. The case of lack of need among employees
Low wages of a single person are burdened with reduced social security contributions. The normal contribution rates only apply to wages of more than 850 euros per month (Appendix 1). Income tax is only due on wages of just under EUR 1,000, solidarity surcharge for wages of over EUR 1,400 (Table 1).
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If someone works 55 hours a month at 8 euros per hour, the gross monthly wage is 440 euros. The net wage is also 440 euros; Employee contributions, wage tax and solidarity surcharge do not apply. The labor costs as the sum of gross wages and employer contributions amount to 572 euros.
If the hourly wage increases by 6.25 percent to the minimum wage of 8.50 euros, the gross monthly wage for 55 hours of work is 467.50 euros. The net wage is then only 413.13 euros. It is 26.87 euros less than before the introduction of the minimum wage. What is decisive for this is that an employee contribution is due. Labor costs drop from 572 to 557.84 euros because the employer's contribution drops.
If the employee concerned wants to achieve a net wage of 440 euros with an increased hourly wage, he must work 59.6 instead of 55 hours per month. The gross wage is then 506.60 euros. The labor costs amount to 604.50 euros.
The statements made so far do not take into account the fact that - all other things being equal - there will be adjustment processes in the medium term. In the case in question, an employer would be readily prepared to pay a higher wage, namely EUR 479.36 per month (EUR 8.72 per hour). With this wage, the labor costs (with employer contributions of 92.64 euros) would be 572 euros as high as before. The net wage would be 421.29 euros. It would be greater than 413.13 euros, but lower than before the introduction of the minimum wage.
In other cases, too, the net wage falls. With a working time of 56 hours and an hourly wage of 7.50 euros, gross and net wages are 420 euros. If the gross hourly wage increases by 11.3 percent from 7.50 to 8.50 euros for a working time of 56 hours, the gross wage is 476 euros and the net wage falls. It amounts to 418.98 euros. Labor costs rise from 546 to around 568 euros. Because of the rise in labor costs, adjustment processes are likely to result in a lower gross wage.
II. The case of employees in need
Employable people who are in need of help and who do not exceed certain age limits are entitled to basic security for jobseekers (unemployment benefit II). The entitlement consists of the standard rate or the standard rate total (in the case of multi-person households) and the reimbursement of the costs of accommodation (rent excluding heating plus heating costs). Additional services are available under certain conditions. Additional needs in this sense, e.g. for pregnant women or for disabled people of working age, are not taken into account here.
The standard rate for a single person in 2015, regardless of the region in which he lives, is 399 euros per month (refrago.de - standard rates for Hartz IV and social welfare 2014). Accommodation costs vary from region to region; here it is assumed that they amount to an average of EUR 310 per month for a single person. The total entitlement then amounts to 709 euros. It is assumed that there is no investment income and that assets do not have to be taken into account, i.e. the full entitlement exists in the event of inactivity.
The earned income of a person in need is counted towards the entitlement to unemployment benefit II according to certain principles (Table 2). The entitlement decreases according to the crediting rule (Boss 2015). Income from work in the amount of 100 euros is not taken into account; Deductions (e.g. for income-related expenses, contributions to private insurance, pension contributions) are compensated by a "basic allowance" ˜ of 100 euros. For wages between 100 and 1,000 euros per month, the tax exemption increases by 20 percent of the additional wage; the disposable income as the sum of net wages and unemployment benefit II increases in this wage interval by 20 percent of the additional wage. For wages between 1,001 and 1,200 euros per month, the tax exemption increases by 10 percent of the additional wage; disposable income increases by 10 percent of the additional wage. The income situation of a single person without children improves with increasing income despite the fact that a very large part of the net income is taken into account as long as the wage does not exceed EUR 1,200.
The situation is different if the wage of a single person exceeds 1,200 euros. Then a wage increase does not lead to an increase in disposable income as long as the wage is not higher than 1,343 euros. In the range of EUR 1,200 to EUR 1,343, the limit load - regardless of its definition - is 100 percent (Appendix 2).
If the gross wage of an employee in need of help increases from EUR 7.60 to EUR 8.50 per hour as a result of the introduction of the minimum wage with working hours of 158 hours per month, the gross monthly wage increases from EUR 1,201 to EUR 1,343 with unchanged working hours. The net wage increases by around 88 euros, but unemployment benefit II decreases as the net wage increases; disposable income does not change. It is still € 1,009.
This result also occurs if, with unchanged working hours, the wage increases from an amount between 7.60 and 8.50 euros to 8.50. The marginal tax rate is 100 percent in the range between 1,200 and 1,343 euros. The amount of gross wages, for which the marginal tax rate is 100 percent, depends on the regionally different amount of reimbursed accommodation costs.
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The introduction of the minimum wage can lead to an employee's net wage falling while working hours remain unchanged. This is the consequence of a social security regulation. With a gross wage of up to 450 euros per month, only the employer pays social security contributions; for wages above 450.01 euros per month, the employee also pays social security contributions.
If an employee is entitled to unemployment benefit II because of a low income, an increased gross wage - as a result of the introduction of the minimum wage - can lead to an increase in the net wage, but the entitlement to unemployment benefit II decreases to the extent that the net wage increases, so that disposable income does not change.
Appendix 1: Normal burden of social security contributions and reduced contributions for mini-jobs and midi-jobs
The burden of gross wages (wages) through social security contributions in 2015 amounts to 39.55 percent in total, but 39.80 percent for insured persons aged 23 and over, provided they have no children. Childless insured persons over the age of 23 pay an extra contribution to the social long-term care insurance; it amounts to 0.25 percent of the gross wage. The contributions are levied on wages below the different contribution assessment limits - depending on the insurance class and depending on the region (former federal territory, new federal states) (www.lohn-info.de 2014b). Special rules apply to wages of up to 850 euros per month; they mean that the load is lower than usual.
The marginal employment, employment with a wage of a maximum of 450 euros (mini job), is charged at a flat rate of 30 percent, even if it is a part-time job of an employee who is subject to social insurance. The levy is to be paid by the employer; there is no employee contribution. The tax rate is made up of 15 percent for pension insurance, 13 percent for health insurance and 2 percent for the regional authorities (wage tax including solidarity surcharge and church tax, § 40a (2) Income Tax Act). In addition, there are levies such as the insolvency levy, which are not taken into account here.
There is also a contribution relief for a remuneration of 450.01 to 850 euros per month (midi jobs). The total contribution rate increases in this area (, sliding zone “˜) linearly from 30 percent to the normal contribution rate. The employer contributions are due in full, the employee contribution is calculated as the difference between the total contribution and the employer contribution. In addition, there is the premium for childless (from 23 years) in the social long-term care insurance (0.25 percent), which the employees have to pay.
The total contribution in the sliding zone is based on the fictitious income subject to contributions (www.lohn-info.de 2014a). This is set as
F is the quotient of 30 percent and 39.55 percent, the total social security contribution rate. For 2015, F is 0.7585 based on the assumptions made for the contribution rates. The fictitious contributory income is thus
The normal contribution rates are applied to these in order to determine the total contribution. The employer's share is calculated on the basis of the actual salary. The employee's share is the difference (www.lohn-info.de 2014a); for childless people the surcharge is added to the contribution to social long-term care insurance.
The calculation steps are shown for selected wages between 450.01 and 850 euros (“sliding zone”) (Table A1).
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Appendix 2: The marginal burden of a single person with a low wage
The marginal burden on the gross wage of a single person through social security contributions, wage tax, the solidarity surcharge and the reduction in unemployment benefit II is high, but is below 100 percent if the wage does not exceed 1,200 euros. The calculation is based on the gross wage as a reference value (Table A2). If one calculates what makes more economic sense as a result of transfer processes, the marginal burden in relation to the labor costs of a company (gross wages including employer's social security contributions), then the marginal burden is higher. However, it is less than 100 percent for wages below EUR 1,200.
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 The wage tax is determined using the tables for 2014 (BMF 2015). In 2015, however, it will probably be slightly lower because the deductible amounts when determining the taxable income - given the expected development of the contribution rates - are likely to be slightly higher than in 2014. In addition, the basic tax allowance for income taxation will be retrospectively at the beginning of the year 118 euros increased. Neither has any impact on the conclusions.
 See in detail Boss (2015). A reference to such results can be found in the spring report of the joint diagnosis project group. "The calculation makes it clear ... that the income situation of households with low incomes does not improve in many cases by raising the hourly wage to the minimum wage" (Projektgruppe Gemeinschaftsdiagnose 2015: 65).
 Marginal tax rates of 100 percent can be avoided if the credit rule is changed (Boss 2015).
 The marginally paid employment is exempt from social insurance for employees with the exception of the compulsory pension insurance. However, as assumed here, an employee can be exempted from this.
 For marginal part-time employment in private households, the tax rate is 12 percent (5 and 5 and 2 percent); For people who are not insured in the statutory health insurance, there is no health insurance contribution (5 percent).
 Both the employee and the employer contribution are ultimately borne by the employees as a result of transfer processes.
- Beck, L., and S. J. Roth (2015). Help for the internship generation? On the effect of the minimum wage for interns, in economic freedom.
- BMF (Federal Ministry of Finance) (2015): Calculation of wage tax.
- Boss, A. (2015). Does a minimum wage prevent the state from being exploited? List Forum for Economic and Financial Policy, Volume 40 (2014), Issue 4, pp. 322–331.
- Neumann, M. (2015). The minimum wage and what it does to the vocational training market, in economic freedom.
- Joint diagnosis project group (2015). Strong upswing thanks to cheap oil and a weak euro. Munich.
- refrago.de - standard rates for Hartz IV and social assistance, new standard rates for basic security from 01.01.2015.
- Economic Freedom (2015). The minimum wage does not make Germany fairer. Interview with labor market researcher Ronnie Schöb.
- www.lohn-info.de (2014a) - Information on wage and salary accounting, contribution calculation in the sliding zone for 2015.
- www.lohn-info.de (2014b) - TEXT information on payroll accounting, social security contributions 2015 - Planned values, http://www.lohn-info.de/sozialversicherungsbeitraege2014.html.
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