Rising Wage Inequality in Germany

Abstract

Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp06019.pdf . Two samples of workers, one for all workers including the self-employed and one for the group of prime age dependent male workers, have been drawn from the GSOEP. The increase in wage inequality is decomposed econometrically into a composition, a price and a residual effect. Not surprisingly, the paper confirms the well known stability of the West German wage distribution for the period 1984 to 1994. Wage inequality started to rise around 1994 in the sample for prime age dependent male workers in both parts of Germany. In the sample for all workers, including the self-employed, the trend towards rising wage inequality started around 1996. The main reason for this lag is that there is no rising inequality for the group of self-employed worker, although the level of inequality is higher compared to wage worker. Non technical summaryThe evolution of wage inequality differs in East compared to West Germany. Rising wage inequality in West Germany primarily occurred in the lower part of the wage distribution, and wage inequality in East Germany primarily occurred in the upper part of the wage distribution. These differences presumably are due to the adjustment processes of the two parts of Germany and the induced competition for high wage workers. Surprisingly, the evolution of wage inequality in East Germany seems to have some similarities to the evolution of wage inequality in the United States in the 80s.There are some more interesting and economically meaningful results from the econometric decomposition analysis. For West German workers residual wage inequality "explains" roughly two thirds of rising inequality, with composition and price effects accounting for one third of the rising inequality. For East German workers residual wage inequality "explains" roughly 40 percent, whereas price effects account for roughly 50 percent of the rising inequality.Rising wage inequality seems to be a general trend in the sense that it is not restricted to wage workers with specific characteristics, although it is quantitatively more pronounced among low skilled workers and workers with low tenure in West Germany. High rates of unemployment, presumably reinforced by non-neutral technical change, led to wage adjustment primarily through wage decreases for the low skilled and for entrants. Wages for workers with longer years of tenure are more rigid and firm's adjustment for this group of employees takes place primarily through reductio...

Revisiting the German Wage Structure*

“…Our analysis further indicates that inequality rose during the 1990s in the GSOEP, in particular at the bottom of the wage distribution, which has also been stressed by Gernandt and Pfeiffer (2006). wage gaps rose by 0.059 and 0.058 in the IABS.…”

Assessing Intergenerational Earnings Persistence among German Workers

“…Table 9 depicts the advantage of a child with parents in the top permanent earnings decile compared to offspring born to parents in the bottom decile as determined by equation (21) (Corak 2004). For Germany, Gernandt & Pfeiffer (2007) calculate a 90/10-percentile earnings ratio of 2.5 for a cross-section sample of prime age dependent male workers in 2005, which is rather close to our sample. Then, taking our advocated value for an intergenerational elasticity in Germany of β GER y = 1 3 , the expected earnings advantage amounts to 35%.…”

Educational Expansion and Its Heterogeneous Returns for Wage Workers

“…Despite of a continuing upgrading of educational qualification they started to increase from 1998 onwards (see figure 1). This surprising finding seems to be line with rising wage inequality in Germany that started around 1994 (see Gernandt and Pfeiffer, 2006b). …”

“…However, as a result of skill upgrading and globalisation the union wage policies may have lost part of its aggressiveness. Starting around 1992/93 wage inequality increased in Germany (Gernandt and Pfeiffer, 2006b) combined with rising returns to education.…”