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Understanding Rising Income Inequality in Germany

Author

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  • Biewen, Martin

    () (University of Tuebingen)

  • Juhasz, Andos

    () (University of Tuebingen)

Abstract

We examine the causes for rising income inequality in Europe’s most populous economy. From 2000 to 2006, Germany experienced an unprecedented rise in net equivalized income inequality and poverty. At the same time, unemployment rose to record levels and there was evidence for a widening distribution of labour market returns, as well as that of other market incomes. Other factors that possibly contributed to the rise in income inequality were changes in the tax system, changes in the household structure (in particular the rising share of single parent households), and changes in other socio-economic characteristics (e.g. age or education). We address the question of which factors were the main drivers of the observed inequality increase. Our results suggest that most of the increase can be explained by both changes in employment outcomes and in market returns, and, to a similar extent, by changes in the tax system. Changes in household structures and other household characteristics seem to have played a much smaller role. Put into an international perspective, our results suggest that rising income inequality in non-Anglo-Saxon countries is the likely result of both increasing inequality in market returns and increasing inequality in employment outcomes, as well as of idiosyncratic changes such as tax reforms.

Suggested Citation

  • Biewen, Martin & Juhasz, Andos, 2010. "Understanding Rising Income Inequality in Germany," IZA Discussion Papers 5062, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp5062
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    Cited by:

    1. Biewen, Martin, 2012. "Additive Decompositions with Interaction Effects," IZA Discussion Papers 6730, Institute for the Study of Labor (IZA).
    2. John Hatgioannides & Marika Karanassou, 2011. "Warrant Economics, Call-Put Policy Options and the Fallacies of Economic Theory," Working Papers 686, Queen Mary University of London, School of Economics and Finance.
    3. Weigert, Benjamin & Klemm, Marcus, 2015. "Composition matters! Wage inequality and the demographic and educational structure of the labor force in Germany," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112914, Verein für Socialpolitik / German Economic Association.
    4. Müller, Kai-Uwe & Steiner, Viktor, 2011. "Beschäftigungswirkungen von Lohnsubventionen und Mindestlöhnen - Zur Reform des Niedriglohnsektors in Deutschland," Discussion Papers 2011/4, Free University Berlin, School of Business & Economics.
    5. Beate Jochimsen & Christian Raffer, 2016. "Herausforderungen bei der Messung von Wohlfahrt," Discussion Papers of DIW Berlin 1595, DIW Berlin, German Institute for Economic Research.
    6. Markus M. Grabka & Ursina Kuhn, 2012. "The Evolution of Income Inequality in Germany and Switzerland since the Turn of the Millennium," SOEPpapers on Multidisciplinary Panel Data Research 464, DIW Berlin, The German Socio-Economic Panel (SOEP).
    7. John Hatgioannides & Marika Karanassou & Hector Sala, 2013. "Eurozone: The Untold Economics," Working Papers 699, Queen Mary University of London, School of Economics and Finance.

    More about this item

    Keywords

    kernel density estimation; unemployment; poverty; income inequality;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General

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