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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. 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.
  2. Johannes Gernandt & Friedhelm Pfeiffer, 2007. "Rising Wage Inequality in Germany," SOEPpapers on Multidisciplinary Panel Data Research 14, DIW Berlin, The German Socio-Economic Panel (SOEP).
  3. repec:cup:cbooks:9780521845731 is not listed on IDEAS
  4. Dirk Krüger, 2009. "Inequality Trends for Germany in the Last Two Decades: A Tale of Two Countries," MEA discussion paper series 09184, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  5. Christian Dustmann & Johannes Ludsteck & Uta Schönberg, 2009. "Revisiting the German Wage Structure," The Quarterly Journal of Economics, MIT Press, vol. 124(2), pages 843-881, May.
  6. 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.
  7. 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.
  8. Michael Roos, 2006. "Earnings Disparities in Unified Germany: Nominal versus Real," Jahrbuch für Regionalwissenschaft, Springer, vol. 26(2), pages 171-189, October.
  9. repec:cup:cbooks:9780521608275 is not listed on IDEAS
  10. Wolfgang Franz & Viktor Steiner, 2000. "Wages in the East German Transition Process: Facts and Explanations," German Economic Review, Verein für Socialpolitik, vol. 1(3), pages 241-269, 08.
  11. Gernandt, Johannes & Pfeiffer, Friedhelm, 2008. "Wage Convergence and Inequality after Unification: (East) Germany in Transition," ZEW Discussion Papers 08-022, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  12. Gerlach, Knut & Stephan, Gesine, 1996. "A paper on unhappiness and unemployment in Germany," Economics Letters, Elsevier, vol. 52(3), pages 325-330, September.
  13. 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.
  14. 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.
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