Dynamics of Earnings and Hourly Wages in Germany

26 Pages Posted: 19 Oct 2008

See all articles by Michal Myck

Michal Myck

German Institute for Economic Research (DIW Berlin); IZA Institute of Labor Economics

Richard R. Ochmann

German Institute for Economic Research (DIW Berlin)

Salmai Qari

German Institute for Economic Research (DIW Berlin); Berlin School of Economics and Law

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Abstract

There is by now a vast number of studies which document a sharp increase in cross-sectional wage inequality during the 2000s. It is often assumed that this inequality is of a permanent nature which in turn is used as an argument calling for government intervention. We examine these claims using a fully balanced panel of full-time employed individuals in Germany from the German Socio-Economic Panel for the years 1994-2006. In line with previous studies, our sample shows sharply rising inequality during the 2000s. Applying covariance structure models, we calculate the fraction of permanent and transitory wage and earnings inequality. From 1994 on, permanent inequality increases continuously, peaks in 2001 and then declines in subsequent years. Interestingly the decline in the permanent fraction of inequality occurs at the time of most rapid increases in cross-sectional inequality. It seems therefore that it is primarily the temporary and not the permanent component which has driven the strong expansion of cross-sectional inequality during the 2000s in Germany.

Keywords: variance decomposition, covariance structure models, earnings inequality, wage dynamics

JEL Classification: C23, D31, J31

Suggested Citation

Myck, Michal and Ochmann, Richard R. and Qari, Salmai, Dynamics of Earnings and Hourly Wages in Germany. IZA Discussion Paper No. 3751, Available at SSRN: https://ssrn.com/abstract=1286689 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Michal Myck (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

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Berlin, 10117
Germany

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
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Richard R. Ochmann

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Salmai Qari

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Berlin School of Economics and Law ( email )

Badensche Strasse 50-51
Berlin, D-10825
Germany

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