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On the Post-Unification Development of Public and Private Pay in Germany

  • Heitmueller, Axel

    ()

    (Imperial College London)

  • Mavromaras, Kostas G.

    ()

    (NILS, Flinders University)

German post-unification in the 1990s is a period that was marked by substantial economic change, part of which was East German wages building towards the much higher West German levels. This paper studies the public-private pay gap in the fast changing economic and political environment of the 1990s using panel estimation techniques which control for unobserved individual heterogeneity. It shows that, while the overall pay gap between public and private sector stayed remarkably constant in the West, earnings differences in the East increased threefold in the late 1990s resulting in a substantial wage premium in the public sector. It is suggested that this premium is a result of the politically induced gap between pay and actual productivity. Furthermore, results vary greatly by gender indicating significantly larger female earnings differentials. Several institutional and political arguments are presented to explain this phenomenon.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1696.

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Length: 21 pages
Date of creation: Jul 2005
Date of revision:
Publication status: published in: Manchester School, 2007, 75 (4), 422–444
Handle: RePEc:iza:izadps:dp1696
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  1. Andrew Henley & Dennis Thomas, 2001. "Public Service Employment and the Public- Private Wage Differential in British Regions," Regional Studies, Taylor & Francis Journals, vol. 35(3), pages 229-240.
  2. Dustmann, C. & van Soest, A.H.O., 1997. "Wage structures in the private and public sectors in West Germany," Other publications TiSEM f1b3bfed-ce84-471a-a9d7-1, Tilburg University, School of Economics and Management.
  3. Hartog, Joop & Oosterbeek, Hessel, 1993. "Public and private sector wages in the Netherlands," European Economic Review, Elsevier, vol. 37(1), pages 97-114, January.
  4. Hans-Werner Sinn, 1995. "Staggering along: wages policy and investment support in East Germany," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(4), pages 403-426, December.
  5. 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.
  6. Dustmann, C. & van Soest, A., 1997. "Public and Private Sector Wages of Male Workers in Germany," Economics Working Papers eco97/13, European University Institute.
  7. Michael C. Burda & Christoph M. Schmitd, 1997. "Getting Behind the East-West [German] Wage Differential: Theory and Evidence," William Davidson Institute Working Papers Series 105, William Davidson Institute at the University of Michigan.
  8. Oaxaca, Ronald L. & Ransom, Michael R., 1994. "On discrimination and the decomposition of wage differentials," Journal of Econometrics, Elsevier, vol. 61(1), pages 5-21, March.
  9. Heitmueller, Axel, 2005. "A Note on Decompositions in Fixed Effects Models in the Presence of Time-Invariant Characteristics," IZA Discussion Papers 1886, Institute for the Study of Labor (IZA).
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