Business needs employees in order to produce. The extent of this need depends on the productivity of the available workplaces and the productivity of the workers. Productivity is determined by the state of the art, the competition, the costs of other factors of production and many other items; the productivity of employees by education, motivation and other factors. Since enterprises cannot be forced to employ people, they only look for employees whose costs are below, or at most equal to, the productivity on the available workplaces. If they employed people who were more expensive than what they are able to achieve in the available jobs, they would incur losses and their situation would worsen. Since the amount of jobs that can be managed profitably is obviously all the smaller the higher the wage are, wage increases, under otherwise equal conditions, lead to a decrease in employment. The law of demand, according to which the saleable amount of a good falls with increasing prices, is not suspended for the labour market.
The law of demand is frequently neglected in the public discussion regarding the introduction of minimum wages. Wish and reality are confused when people say that minimum wages must be introduced so that everyone can live by the work of their hands. Even though this postulate receives spontaneous approval, it cannot be implemented in a market economy. What can be implemented is only the postulate that everyone who wants to work can work, and that they then have enough to live on. This postulate does not require that everyone earn the money they need to live themselves. If the state contributes wage supplements - a policy the Ifo Institute has favoured for some time - the postulate can be fulfilled. But it is impossible to implement via minimum wages.
Refereed scientific monographs
Can Germany be Saved? The Malaise of the World’s First Welfare State, MIT Press: Cambridge, Mass., 2007, 356 pages. (Revised and updated translation of Ist Deutschland noch zu retten?). To Amazon.
Non-refereed scientific monographs
Redesigning the Welfare State: Germany’s Current Agenda for an Activating Social Assistance (together with Martin Werding et al.), Edward Elgar: Cheltenham, UK; Northhampton, USA, 2006, 204 pages. Order via Edward Elgar.
Ifo Viewpoints
Ifo Viewpoint No. 64: Why Minimum Wages Hurt Germany, Apr 15, 2005.
Ifo Viewpoint No. 61: How to Combat German Unemployment, Feb 14, 2005.
Ifo Viewpoint No. 59: Why Extending Working Hours Will Create More Jobs, Nov 18, 2004.
Ifo Viewpoint No. 51: Low Wages, Wage Subsidies and Investive Wages, Mar 4, 2004.
Ifo Viewpoint No. 47: Working Longer, Jul 25, 2003.