May 1998

IZA DP No. 8: Das Entsendegesetz: Suendenfall oder Loesung des Arbeitslosigkeitsproblems?

published in: Staatswissenschaften und Staatspraxis, 1998, 9 (2), 191-208;
see IZA Reprints 4/99

In March 1996, the Bundestag introduced a minimum wage law for the German construction business in order to protect native workers from low wage competition by posted workers from other EU countries. This Entsendegesetz (Posted Workers Act) was backed formally by the EU Posted Workers Directive of December 1996. This paper analyzes the economic and political background of the law as well as its impact on the German construction business according to economic theory and provisional empirical evidence from similar protective measures taken in the U.S. The effectiveness of the law is seriously limited by practical and conceptional problems, like resource constraints in control, shifts from legal to illegal employment, or compatibility with basic EU law and principles. Moreover, since the central problems of the German construction business are structural, one cannot expect much of a relief for the labor market of native workers. Since the Entsendegesetz seems therefore only justifiable in the short run in order to smoothen structural adjustment and to avoid political unrest and xenophobia, it should not be extended.