Germany's new minimum wage to boost shadow economy

A new study warns that Germany’s shadow economy may start to grow as businesses take on the nation's new national minimum wage.

A report published last week by the Institute for Applied Economic Research calculated that the proportion of the Germany’s GDP fueled by its shadow economy this year will remain unchanged from last year at 12.2%.

This would mark the first year in two decades that Germany’s parallel economy has not shrunk.

According to the report, this year has seen a dramatic rise in the number of people seeking unreported employment. This has coincided with Germany’s newly introduced minimum wage of €8.50 per hour, as well as a rise in nursing care insurance.

As more and more German businesses attempt to avoid paying the minimum wage, the report’s authors estimate that the economy will be set to lose out on around €1.5bn.

As David Neumark discusses, introducing or increasing minimum wages may discourage employers from using the low-wage, low-skill workers that minimum wages are intended to help. As such, these rising labor costs risk being offset by job destruction.

Meanwhile, Dominik H. Enste writes that a nation’s shadow economy should not simply be tackled with higher fines or tougher controls. Instead, a country-specific analysis should identify ways in which to make official institutions more attractive to workers, either by improving regulation, tax systems, or overall efficiency.

Read more here.

Related articles:
Employment effects of minimum wages, by David Neumark
The shadow economy in industrial countries, by Dominik H. Enste