The effects of age, skill and sector composition on the wage inequality in Germany

Abstract

"This paper aims at analyzing the development of wage inequality for the German labor market from 1984 to 2008. Using the S-IAB, a large administrative data set based on social security data, we have access to very reliable earnings information for a 2 percent random sample of the German workforce. We find that between 1984 and 2008, average earnings of full-time male workers aged 25 to 55 increased by 13 percent in real terms. However, the development of earnings was very different in different parts of the distribution. At the first decile real wages have fallen by about 10 percent, whereas at the ninth decile they have increased by more than 30 percent. Moreover, we show that between 1984 and 2008 earnings inequality rose both between and within age and education subgroups. A substantial part of the increase in inequality is due to changes below the median. Following the decomposition method based on Juhn, Murphy, Pierce (1993), we can disentangle the different sources for the increased wage inequality, namely the price effect, the effect of characteristics and the effect of unobserved residuals which account for 12, 25 and 63 percent respectively in 2008. But also here there are substantial differences between the different subgroups, and the composition shows remarkable changes over time as well. We show that controlling for sector information partly reduces the otherwise clearly dominating residual effect. However, the main explanation (78%) for the increase in the raw variation of male earnings is that wage dispersion within the different sectors increased whereas composition effects seem to be only of minor importance." (Author's abstract, IAB-Doku) ((en))

Cite article

Möller, J. & Hutter, C. (2011): The effects of age, skill and sector composition on the wage inequality in Germany. In: B. Genser, H. J. Ramser & M. Stadler (Hrsg.) (2011): Umverteilung und soziale Gerechtigkeit (Wirtschaftswissenschaftliches Seminar Ottobeuren, 40), p. 9-32.