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Wage Inequality in Germany: Disentangling Demand and Supply Effects

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  • Michael Stimmelmayr

Abstract

In this paper we conduct a counterfactual analysis and estimate the quantitative importance of demand and supply effects on wage inequality in Germany using a dynamic computable general equilibrium (CGE) model of the Auerbach-Kotlikoff (1987) type. Specifically, the methodological contribution of our dynamic CGE model refers to the three-level constant elasticity of substitution production function and the endogenous labor supply of three different skill types, which enable us to isolate the impact of capital-skill complementarity (i.e., demand effects) and varying skill-specific labor supply (i.e., supply effects) on the evolution of the skill premia as defined by the 9th to 1st, the 9th to 5th, and the 5th to 1st decile limit of earnings.In short, our simulation results show that the complementarity effect has a particularly strong positive impact on the skill premium of the high-skilled, while the quantity effect counteracts the complementarity effect and exerts an alleviating pressure on the skill premium of the high-skilled. In quantitative terms, the complementarity effect raises the skill premium of the 9th to 1st and the 9th to 5th decile limit of earnings by more than 1.0 and 0.8 percent per year, respectively. By contrast, the quantity effect reduces both above-mentioned skill premia by almost 0.3 and 0.45 percent per year, respectively. Even though the complementarity and the quantity effects work in opposite directions, the complementarity effect has a much stronger impact on the skill premia of the high-skilled compared with the quantity effect.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2802.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2802

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Keywords: capital-skill complementarity; skill premium; wage inequality; skill-specific labor supply; dynamic general equilibrium analysis;

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References

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  1. Pfeiffer, Friedhelm & Gernandt, Johannes, 2007. "Rising Wage Inequality in Germany," ZEW Discussion Papers 06-019 [rev.2], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Stimmelmayr, Michael, 2007. "Fundamental Capital Income Tax Reforms," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 23, number urn:isbn:9783161492617.
  3. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1996. "Tax Reforms and Investment: A Cross-Country Comparison," NBER Working Papers 5232, National Bureau of Economic Research, Inc.
  4. Martin Feldstein, 2005. "Structural Reform of Social Security," NBER Working Papers 11098, National Bureau of Economic Research, Inc.
  5. Claudia Goldin & Lawrence F. Katz, 1996. "The Origins of Technology-Skill Complementarity," NBER Working Papers 5657, National Bureau of Economic Research, Inc.
  6. Matthew J. Lindquist, 2005. "Capital-Skill Complementarity and Inequality in Sweden," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(4), pages 711-735, December.
  7. Feldstein, Martin, 2005. "Structural Reform of Social Security," Scholarly Articles 2794830, Harvard University Department of Economics.
  8. Chris Papageorgiou & Fidel Pérez Sebastián & John Duffy, 2002. "Capital-Skill Complementarity? Evidence From A Panel Of Countries," Working Papers. Serie AD 2002-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  9. FitzRoy, Felix & Funke, Michael, 1995. "Capital-Skill Complementarity in West German Manufacturing," Empirical Economics, Springer, vol. 20(4), pages 651-65.
  10. Stephen Machin & John Van Reenen, 1998. "Technology and changes in skill structure: evidence from seven OECD countries," IFS Working Papers W98/04, Institute for Fiscal Studies.
  11. Chris Papageorgiou & Viera Chmelarova, . "Nonlinearities in Capital-Skill Complementarity," Departmental Working Papers 2003-07, Department of Economics, Louisiana State University.
  12. Bound, John & Johnson, George, 1992. "Changes in the Structure of Wages in the 1980's: An Evaluation of Alternative Explanations," American Economic Review, American Economic Association, vol. 82(3), pages 371-92, June.
  13. Whited, Toni M., 1994. "Problems with identifying adjustment costs from regressions of investment on q," Economics Letters, Elsevier, vol. 46(4), pages 327-332, December.
  14. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October.
  15. Fallon, P R & Layard, P R G, 1975. "Capital-Skill Complementarity, Income Distribution, and Output Accounting," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 279-301, April.
  16. Fehr, Hans, 1999. "Welfare Effects of Dynamic Tax Reforms," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 5, number urn:isbn:9783161470165.
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