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Wage Growth and Inequality Change During Rapid Economic Transition

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Author Info

  • Ira N. Gang

    ()
    (Rutgers University)

  • Robert C. Stuart

    ()
    (Rutgers University)

  • Myeong-Su Yun

    ()
    (Tulane University)

Abstract

East Germany, a unique socialist command economy prior to the 1990s, underwent rapid transition to a market-oriented economic system. This transition has been of intense interest given the environment of Eastern Germany vis-a-vis Western Germany, a setting different from most other transition economies. However, changes in the Eastern wage structure during transition demonstrates considerable similarity to that occurring in other transition economies. During the course of this transition, East Germany experienced big increases in both its wage level and wage dispersion. From 1990 to 2000 real wages in East Germany for men aged 20-60 rose by 118%, while various inequality measures indicate an increase in wage inequality of 25 to 61%. This paper studies the causes of this growth in wages and the changes in wage inequality, the first two moments of the wage distribution. We find that changes in the wage structure due to the transition explains most of wage growth and inequality change in East Germany. Most of the increases occur at the beginning of the transition. We compare our 1990-2000 results for East Germany to West German wage earners during the same period in order to investigate whether convergences took place in terms of mean (level) and dispersion (inequality).

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Bibliographic Info

Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200631.

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Length: 20 pages
Date of creation: 01 Dec 2006
Date of revision:
Handle: RePEc:rut:rutres:200631

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Keywords: decomposition; transition; wages; inequality;

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References

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  1. Jennifer Hunt, 1999. "Post-Unification Wage Growth in East Germany," NBER Working Papers 6878, National Bureau of Economic Research, Inc.
  2. Myeong-Su Yun, 2005. "A Simple Solution to the Identification Problem in Detailed Wage Decompositions," Economic Inquiry, Western Economic Association International, vol. 43(4), pages 766-772, October.
  3. Robert S. Chase, 1998. "Markets for communist human capital: Returns to education and experience in the Czech republic and Slovakia," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 51(3), pages 401-423, April.
  4. Javier Gardeazabal & Aratza Ugidos, . "More on identification in detailed wage decompositions," Studies on the Spanish Economy 140, FEDEA.
  5. Jennifer Hunt, 1997. "The Transition in East Germany: When is a Ten Point Fall in the Gender Wage Gap Bad News?," NBER Working Papers 6167, National Bureau of Economic Research, Inc.
  6. Alan B. Krueger & Jorn-Steffen Pischke, 1995. "A Comparative Analysis of East and West German Labor Markets: Before and After Unification," NBER Chapters, in: Differences and Changes in Wage Structures, pages 405-446 National Bureau of Economic Research, Inc.
  7. Susan N. Houseman & Katharine G. Abraham, 1995. "Earnings Inequality in Germany," Book chapters authored by Upjohn Institute researchers, in: Richard B. Freeman & Lawrence F. Katz (ed.), Differences and Changes in Wage Structures, pages 371-403 W.E. Upjohn Institute for Employment Research.
  8. Suits, Daniel B, 1984. "Dummy Variables: Mechanics v. Interpretation," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 177-80, February.
  9. Richard B. Freeman & Lawrence F. Katz, 1995. "Differences and Changes in Wage Structures," NBER Books, National Bureau of Economic Research, Inc, number free95-1.
  10. M. Burda & C. Schmidt, 1997. "Getting Behind The East-West Wage Differential: Theory and Evidence," SFB 373 Discussion Papers 1997,77, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  11. Franz, Wolfgang & Steiner, Viktor, 1999. "Wages in the East German transition process: facts and explanations," ZEW Discussion Papers 99-40, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  12. Gang, Ira N. & Yun, Myeong-Su, 2002. "Decomposing Inequality Change in East Germany During Transition," IZA Discussion Papers 579, Institute for the Study of Labor (IZA).
  13. repec:wop:humbsf:1997-77 is not listed on IDEAS
  14. Gang, Ira N. & Stuart, Robert C., 1997. "What difference does a country make? Earnings by Soviets in the Soviet Union and in the United States," The Quarterly Review of Economics and Finance, Elsevier, vol. 37(Supplemen), pages 345-360.
  15. David Card & John E. DiNardo, 2002. "Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 733-783, October.
  16. Edward J. Bird & Johannes Schwarze & Gert Wagner, 1994. "Wage effects of the move toward free markets in East Germany," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 47(3), pages 390-400, April.
  17. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
  18. Francine D. Blau & Lawrence M. Kahn, 1994. "International Differences in Male Wage Inequality: Institutions versus Market Forces," NBER Working Papers 4678, National Bureau of Economic Research, Inc.
  19. Ronald L. Oaxaca & Michael R. Ransom, 1999. "Identification in Detailed Wage Decompositions," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 154-157, February.
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Cited by:
  1. Usamah Fayez Al-Farhan, 2010. "Changes in the Gender Wage Gap in Germany during a Period of Rising Wage Inequality 1999-2006: Was it Discrimination in the Returns to Human Capital?," SOEPpapers on Multidisciplinary Panel Data Research 293, DIW Berlin, The German Socio-Economic Panel (SOEP).
  2. Usamah Fayez Al-Farhan, 2010. "A Detailed Decomposition of Changes in Wage Inequality in Reunified Post-transition Germany 1999-2006: Accounting for Sample Selection," SOEPpapers on Multidisciplinary Panel Data Research 269, DIW Berlin, The German Socio-Economic Panel (SOEP).

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