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20 Years of German Unification: Evidence on Income Convergence and Heterogeneity

  • Brück, Tilman

    ()

    (ISDC - International Security and Development Center)

  • Peters, Heiko

    ()

    (Statistisches Bundesamt)

We analyse the convergence and heterogeneity of living standards between East and West Germany since unification. Based on data from the German Socio-Economic Panel (GSOEP), we compare total individual income of permanent adult residents, including retirees and the unemployed, of East and West Germany over the fifteen years for which data are available. Using a fixed effects vector decomposition method, we estimate the gross total income difference between East and West Germans taking unobserved heterogeneity into account. Our analysis demonstrates that the negative income gap has decreased from 33 per cent in 1992 to 22 per cent in 2002, rising again to 26 per cent in 2007. Hence some convergence took place in nominal terms since unification. Constructing income gaps by decennial cohorts, we discover that the most recent cohorts have the highest negative income gap. This probably reflects out-migration from East Germany by the young and highly skilled. On the basis of quantile regressions we find a positive income gap at the beginning of the 1990s for the lower income deciles (that is higher incomes in East Germany). This was due to retirees in the East with relative long employment histories receiving transfer payments by western standards. The income gap is insignificant when accounting for heterogeneity at the area level by including area level variables to our regression.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4454.

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Length: 23 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:iza:izadps:dp4454
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  1. Johannes Gernandt & Friedhelm Pfeiffer, 2006. "Rising Wage Inequality in Germany," Working Papers of the Research Group Heterogenous Labor 06-12, Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim.
  2. Johannes Gernandt & Friedhelm Pfeiffer, 2008. "Wage Convergence and Inequality after Unification: (East) Germany in Transition," SOEPpapers on Multidisciplinary Panel Data Research 107, DIW Berlin, The German Socio-Economic Panel (SOEP).
  3. Steiner, Viktor & Wagner, Kersten, 1997. "East West German wage convergence - How far have we got?," ZEW Discussion Papers 97-25, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Jan Goebel & Roland Habich & Peter Krause, 2009. "Zur Angleichung von Einkommen und Lebensqualität im vereinigten Deutschland," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 78(2), pages 122-145.
  5. Michael C. Burda & Jennifer Hunt, 2001. "From Reunification to Economic Integration: Productivity and the Labor Market in Eastern Germany," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2), pages 1-92.
  6. repec:cup:cbooks:9780521608275 is not listed on IDEAS
  7. Dustmann, Christian & Ludsteck, Johannes & Schönberg, Uta, 2007. "Revisiting the German Wage Structure," IZA Discussion Papers 2685, Institute for the Study of Labor (IZA).
  8. Nicola Fuchs-Schuendeln & Dirk Krueger & Mathias Sommer, 2010. "Inequality Trends for Germany in the Last Two Decades: A Tale of Two Countries," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 103-132, January.
  9. 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.
  10. Gerlach, Knut & Stephan, Gesine, 1996. "A paper on unhappiness and unemployment in Germany," Economics Letters, Elsevier, vol. 52(3), pages 325-330, September.
  11. repec:cup:cbooks:9780521845731 is not listed on IDEAS
  12. Sonja C. Kassenboehmer & John P. Haisken-DeNew, 2008. "You’re Fired! The Causal Negative Effect of Unemployment on Life Satisfaction," Ruhr Economic Papers 0063, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  13. Frank Heiland, 2004. "Trends in East-West German Migration from 1989 to 2002," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 11(7), pages 173-194, September.
  14. Karl Brenke, 2005. "Income Growth in German Households: East Germany Falls Behind," Weekly Report, DIW Berlin, German Institute for Economic Research, vol. 1(15), pages 193-201.
  15. Michael Roos, 2006. "Earnings Disparities in Unified Germany: Nominal versus Real," Review of Regional Research, Springer, vol. 26(2), pages 171-189, October.
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