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A Detailed Decomposition of Changes in Wage Inequality in Reunified Post-transition Germany 1999-2006: Accounting for Sample Selection

  • Usamah Fayez Al-Farhan
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    In this article, I analyze the changes in wage inequality in the eastern region, western region and reunified Germany a decade after reunification. For that purpose, I use data from the German Socio-Economic Panel for the period 1999 - 2006, and implement the decomposition methodologies of Fields (2003) and Yun (2006). I find that during the sub-period 1999-2002 each of the characteristics effect, coefficient effect and residual effect contributed to the increasing levels of wage inequality in Germany. On the other hand, the relative stability in wage inequality during the sub-period 2002-2006 was caused by the fact that the characteristics effect and the residual effect influenced wage inequality negatively, whereasthe coefficient effect maintained a positive influence in both the western region, eastern region and in reunified Germany alike. Hence, I conclude that after 1999, changes in wage inequality in Germany can be explained by both; changes in workers characteristics and changes in the wage structure, and not by changes in the wage structure alone, as the case has been during the transition process in the first decade after reunification

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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.347231.de/diw_sp0269.pdf
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    Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 269.

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    Length: 65 p.
    Date of creation: 2010
    Date of revision:
    Handle: RePEc:diw:diwsop:diw_sp269
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    1. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP): Scope, Evolution and Enhancements," SOEPpapers on Multidisciplinary Panel Data Research 1, DIW Berlin, The German Socio-Economic Panel (SOEP).
    2. Robert Orlowski & Regina T. Riphahn, 2008. "The East German Wage Structure after Transition," CESifo Working Paper Series 2511, CESifo Group Munich.
    3. 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.
    4. Alan B. Krueger & Jorn-Steffen Pischke, 1992. "A Comparative Analysis of East and West German Labor Markets: Before and After Unification," NBER Working Papers 4154, National Bureau of Economic Research, Inc.
    5. Gernandt, Johannes & Pfeiffer, Friedhelm, 2006. "Rising Wage Inequality in Germany," ZEW Discussion Papers 06-19 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. 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.
    7. 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.
    8. Ira N. Gang & Myeong-Su Yun, 2002. "Decomposing Inequality Change in East Germany During Transition," Departmental Working Papers 200220, Rutgers University, Department of Economics.
    9. Biewen, Martin, 2000. "Income Inequality in Germany during the 1980s and 1990s," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 46(1), pages 1-19, March.
    10. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
    11. John DiNardo & Nicole M. Fortin & Thomas Lemieux, 1995. "Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach," NBER Working Papers 5093, National Bureau of Economic Research, Inc.
    12. Martin Biewen, 2001. "Measuring the Effects of Socio-Economic Variables on the Income Distribution: An Application to the East German Transition Process," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 185-190, February.
    13. Arranz-Aperte, Laura & Heshmati, Almas, 2003. "Determinants of Profit Sharing in the Finnish Corporate Sector," IZA Discussion Papers 776, Institute for the Study of Labor (IZA).
    14. Ira N. Gang & Robert C. Stuart & Myeong-Su Yun, 2006. "Wage Growth and Inequality Change During Rapid Economic Transition," Departmental Working Papers 200631, Rutgers University, Department of Economics.
    15. 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.
    16. Ira N. Gang & Catherine Y. Co & Myeong-Su Yun, 1999. "Returns to Returning," Departmental Working Papers 199813, Rutgers University, Department of Economics.
    17. Richard V. Burkhauser & Michaela Kreyenfeld & Gert G. Wagner, 1997. "The German Socio-Economic Panel: A Representative Sample of Reunited Germany and its Parts," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 66(1), pages 7-16.
    18. 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.
    19. Jennifer Hunt, 1998. "Post-Unification Wage Growth in East Germany," William Davidson Institute Working Papers Series 304, William Davidson Institute at the University of Michigan.
    20. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
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    22. Fields, Gary S & Yoo, Gyeongjoon, 2000. "Falling Labor Income Inequality in Korea's Economic Growth: Patterns and Underlying Causes," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 46(2), pages 139-59, June.
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