Revisiting the German Wage Structure

70 Pages Posted: 18 Apr 2007

See all articles by Christian Dustmann

Christian Dustmann

University College London; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Johannes Ludsteck

Government of the Federal Republic of Germany - Institute for Employment Research (IAB)

Uta Schönberg

University of Rochester; IZA Institute of Labor Economics

Date Written: March 2007

Abstract

This paper challenges the view that the wage structure in West Germany has remained stable throughout the 80s and 90s. Based on a 2% sample of social security records, we show that wage inequality has increased in the 1980s, but only at the top of the distribution. In the early 1990s, wage inequality started to rise also at the bottom of the distribution. Hence, while the US and Germany experienced similar changes at the top of the distribution throughout the 80s and 90s, the patterns at the bottom of the distribution are reversed. We show that changes in the education and age structure can explain a substantial part of the increase in inequality, in particular at the top of the distribution. We further argue that selection into unemployment cannot account for the stable wage structure at the bottom in the 80s. In contrast, about one third of the increase in lower tail inequality in the 90s can be related to de-unionization. Finally, fluctuations in relative supply play an important role in explaining trends in the skill premium. These findings are consistent with the view that technological change is responsible for the widening of the wage distribution at the top. The widening of the wage distribution at the bottom, however, may be better explained by episodic events, such as changes in labour market institutions and supply shocks.

Keywords: inequality, polarization, institutions

JEL Classification: J3, D3, O3

Suggested Citation

Dustmann, Christian and Ludsteck, Johannes and Schönberg, Uta, Revisiting the German Wage Structure (March 2007). IZA Discussion Paper No. 2685. Available at SSRN: https://ssrn.com/abstract=980724

Christian Dustmann (Contact Author)

University College London ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom
+44 20 7679 5832 (Phone)
+44 20 7916 2775 (Fax)

Institute for Fiscal Studies (IFS)

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Johannes Ludsteck

Government of the Federal Republic of Germany - Institute for Employment Research (IAB) ( email )

Regensburger Str. 104
Nuremberg, 90478
Germany

Uta Schönberg

University of Rochester ( email )

Rochester, NY 14627
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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