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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)

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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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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
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Handle: RePEc:rut:rutres:200631

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Related research
Keywords: decomposition; transition; wages; inequality;

Find related papers by JEL classification:
D30 - Microeconomics - - Distribution - - - General
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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    Other versions:
  2. Blau, Francine D & Kahn, Lawrence M, 1996. "International Differences in Male Wage Inequality: Institutions versus Market Forces," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 791-836, August. [Downloadable!] (restricted)
    Other versions:
  3. M. Burda & C. Schmidt, . "Getting Behind The East-West Wage Differential: Theory and Evidence," Sonderforschungsbereich 373 1997-77, Humboldt Universitaet Berlin.
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    Other versions:
  6. Gang, Ira N. & Yun, Myeong-Su, 2002. "Decomposing Male Inequality Change in East Germany During Transition," IZA Discussion Papers 579, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Javier Gardeazabal & Arantza Ugidos, 2004. "More on Identification in Detailed Wage Decompositions," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 1034-1036, 04. [Downloadable!] (restricted)
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  8. Jennifer Hunt, 2002. "The Transition in East Germany: When Is a Ten-Point Fall in the Gender Wage Gap Bad News?," Journal of Labor Economics, University of Chicago Press, vol. 20(1), pages 148-169, January. [Downloadable!]
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  9. Wolfgang Franz & Viktor Steiner, 2000. "Wages in the East German Transition Process: Facts and Explanations," German Economic Review, Blackwell Publishing, vol. 1(3), pages 241-269, 08. [Downloadable!] (restricted)
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    Other versions:
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  13. Richard B. Freeman & Lawrence F. Katz, 1995. "Differences and Changes in Wage Structures," NBER Books, National Bureau of Economic Research, Inc, number free95-1.
  14. 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. [Downloadable!]
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  15. Suits, Daniel B, 1984. "Dummy Variables: Mechanics v. Interpretation," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 177-80, February. [Downloadable!] (restricted)
  16. 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. [Downloadable!]
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  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. [Downloadable!] (restricted)
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