Wages in the East German Transition Process: Facts and Explanations

Abstract

We analyze wage developments in the East German transition process both at the macro and at the microeconomic level. At the macroeconomic level, we draw special attention to the important distinction between product and consumption wages, describe the development of various wage measures, labor productivity and unit labor costs in East Germany in relation to West Germany, and relate these developments to the system of collective wage bargaining. At the microeconomic level, we describe changes in the distribution of hourly wages between 1990 and 1997 and analyze the economic factors determining these changes by way of empirical wage functions estimated on the basis of the Socio-Economic Panel for East Germany. The paper also draws some conclusions on the likely future course of the East-West German wage convergence process.Nominal wages in East Germany increased dramatically in the first years after unification, which had very different effects on labor costs on the one hand, and the standard of living of East Germans on the other. Unit labor costs skyrocketed at the beginning of the transition process and have since come down only slightly still exceeding the West German level still by a wide margin. This resulted in a dramatic decline of employment and extremely high unemployment rates in East Germany, which implies that observed productivity increases do not represent real productivity gains in the East German economy and can therefore not be distributed to workers without causing excessive unemployment.While East German wages increased substantially throughout the wage distribution, there was also a pronounced increase in wage inequality. The upper ranks of the wage distribution saw the highest increases in real wages although there were also marked improvements for the lower ranks. By 1997, overall wage inequality for East German men has reached roughly the same level as in West Germany, while female wages in East Germany are distributed much more unequally than in West Germany now.The pronounced upward-shift of the female wage-experience profile in the public sector together with the substantial increase of the share of women working in this sector is an important factor for the observed gender differences in the development of the East German wage distribution after unification. To a large extent, this also explains the fact that the still existing wage differential between East and West Germany has become much smaller for women than for men. However, it seems unlikely that the very large share of women working in the public sector, often employed on heavily subsidized public works programs, is sustainable in the future. In the private sector of the East German economy it will still take a long time before wages have reached West German levels. Wages in the East German Transition ProcessFacts and Explanations Wolfgang Franz and Viktor Steiner Zentrum für Europäische Wirtschaftsforschung (ZEW) Centre for European Economic Research Mannheim June 1999Abstract: We analyze wage developments in the East German t...

Wage Convergence and Inequality after Unification: (East) Germany in Transition

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“…Our approach is to compare the wage distribution of East German workers, commuters from East to West Germany and migrants from East to West Germany with their statistical twins from the West German workforce. Migration to West Germany, especially among the younger highly skilled workers still continues, indicating ongoing transition processes (compare also Burda et al 1998, Franz and Steiner, 2000, Hunt 2006, Uhlig 2006. Our empirical part builds on samples for these groups of workers extracted from the German Socioeconomic Panel (SOEP) 1992(SOEP) -2005.…”

Rising Wage Inequality in Germany

“…Reunification took place in 1990. The transition to a market economy and the resulting adjustment processes in the labour force has prompted intensive research (see Franz andHölzle, 2000 among others). For the purpose of our investigation two samples -one for all workers, one for prime age dependent male workers -have been drawn from the GSOEP 1991 to 2004 (see Table A4 in the appendix).…”

20 Years of German Unification: Evidence on Income Convergence and Heterogeneity

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