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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.

Suggested Citation

  • Heitmueller, Axel & Mavromaras, Kostas G., 2005. "On the Post-Unification Development of Public and Private Pay in Germany," IZA Discussion Papers 1696, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp1696

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    References listed on IDEAS

    1. Hartog, Joop & Oosterbeek, Hessel, 1993. "Public and private sector wages in the Netherlands," European Economic Review, Elsevier, vol. 37(1), pages 97-114, January.
    2. Jennifer Hunt, 2001. "Post-Unification Wage Growth in East Germany," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 190-195, February.
    3. 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.
    4. Dustmann, Christian & van Soest, Arthur, 1998. "Public and private sector wages of male workers in Germany," European Economic Review, Elsevier, vol. 42(8), pages 1417-1441, September.
    5. 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.
    6. 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).
    7. Christian Dustmann & Arthur Van Soest, 1997. "Wage structures in the private and public sectors in West Germany," Fiscal Studies, Institute for Fiscal Studies, vol. 18(3), pages 225-247, August.
    8. 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.
    9. 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.
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    Cited by:

    1. Caponi, Vincenzo, 2017. "Public employment policies and regional unemployment differences," Regional Science and Urban Economics, Elsevier, vol. 63(C), pages 1-12.
    2. Robert Orlowski & Regina T. Riphahn, 2007. "Seniority in Germany: New Evidence on Returns to Tenure for Male Full-time Workers," Working Papers 036, Bavarian Graduate Program in Economics (BGPE).
    3. Gabriela Grotkowska, 2016. "Regional variation in the public sector wage premium in Poland," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 46.
    4. Orlowski, Robert & Riphahn, Regina T., 2008. "Seniority in Germany: New evidence on returns to tenure for male full-time workers," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 41(2/3), pages 139-155.
    5. Kostas Mavromaras & Stephane Mahuteau & Kostas Mavromaras & Sue Richardson & Rong Zhu, 2017. "Public–Private Sector Wage Differentials in Australia," The Economic Record, The Economic Society of Australia, vol. 93, pages 105-121, June.
    6. repec:iab:iabzaf:v:41:i:2/3:p:139-155 is not listed on IDEAS
    7. Gabriele Cardullo, 2012. "Public Sector Wage Bargaining, Unemployment, and Inequality," DEP - series of economic working papers 2/2012, University of Genoa, Research Doctorate in Public Economics.
    8. repec:bla:jpbect:v:19:y:2017:i:2:p:490-510 is not listed on IDEAS
    9. Gabriele Cardullo, 2017. "The Welfare and Employment Effects of Centralized Public Sector Wage Bargaining," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(2), pages 490-510, April.

    More about this item


    public-private sector pay differential; decomposition; Germany;

    JEL classification:

    • J78 - Labor and Demographic Economics - - Labor Discrimination - - - Public Policy (including comparable worth)
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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