Catching-up or falling behind? Wage prospects and labor market performance in Germany

Understanding how individuals form expectations about future wages and how these prospects evolve over time is crucial for assessing the acceptability of existing wage disparities. Providing a novel metric of wage prospects, we propose using probit regressions to assess individual ex-ante expectations of earning a wage from a specific quintile of the wage distribution and relate these estimates to realized (i.e., ex-post) wage outcomes.

Utilizing a large dataset of almost 250,000 observations from the German Socio-Economic Panel, covering the period from 1992 to 2020, our study reveals strong segmentations in the German labor market by gender and region, with women and East German workers more likely to earn lower wages. The 2003-2005 labor market reforms increased the probability of earning lower wages overall but slightly reduced gender and regional segmentation. For the bottom income quintiles, the reforms worsened wage prospects, particularly affecting part-time workers, minijobbers, and workers in West Germany.

Conversely, higher income earners saw improved wage prospects post-reforms. Finally, the new measure of wage prospects is predictive of actual wage transitions and exhibits theory-conform correlation with life satisfaction, which underscores its importance for understanding individual fairness considerations.

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