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Wage Growth and Inequality Change During Rapid Economic Transition

  • Ira N. Gang

    ()

    (Rutgers University)

  • Robert C. Stuart

    ()

    (Rutgers University)

  • Myeong-Su Yun

    ()

    (Tulane University)

East Germany, a unique socialist command economy prior to the 1990s, underwent rapid transition to a market-oriented economic system. This transition has been of intense interest given the environment of Eastern Germany vis-a-vis Western Germany, a setting different from most other transition economies. However, changes in the Eastern wage structure during transition demonstrates considerable similarity to that occurring in other transition economies. During the course of this transition, East Germany experienced big increases in both its wage level and wage dispersion. From 1990 to 2000 real wages in East Germany for men aged 20-60 rose by 118%, while various inequality measures indicate an increase in wage inequality of 25 to 61%. This paper studies the causes of this growth in wages and the changes in wage inequality, the first two moments of the wage distribution. We find that changes in the wage structure due to the transition explains most of wage growth and inequality change in East Germany. Most of the increases occur at the beginning of the transition. We compare our 1990-2000 results for East Germany to West German wage earners during the same period in order to investigate whether convergences took place in terms of mean (level) and dispersion (inequality).

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200631.

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Length: 20 pages
Date of creation: 01 Dec 2006
Date of revision:
Handle: RePEc:rut:rutres:200631
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  1. Richard B. Freeman & Lawrence F. Katz, 1995. "Differences and Changes in Wage Structures," NBER Books, National Bureau of Economic Research, Inc, number free95-1, December.
  2. Ira N. Gang & Myeong-Su Yun, 2002. "Decomposing Inequality Change in East Germany During Transition," Departmental Working Papers 200220, Rutgers University, Department of Economics.
  3. Jennifer Hunt, 1999. "Post-Unification Wage Growth in East Germany," NBER Working Papers 6878, National Bureau of Economic Research, Inc.
  4. Alan B. Krueger & Jorn-Steffen Pischke, 1995. "A Comparative Analysis of East and West German Labor Markets: Before and After Unification," NBER Chapters, in: Differences and Changes in Wage Structures, pages 405-446 National Bureau of Economic Research, Inc.
  5. Javier Gardeazabal & Aratza Ugidos, . "More on identification in detailed wage decompositions," Studies on the Spanish Economy 140, FEDEA.
  6. 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.
  7. Myeong-Su Yun, 2005. "A Simple Solution to the Identification Problem in Detailed Wage Decompositions," Economic Inquiry, Western Economic Association International, vol. 43(4), pages 766-772, October.
  8. Ira N. Gang & Robert C. Stuart, 1997. "What Difference Does a Country Make? Earnings by Soviets in the Soviet Union and in the United States," Departmental Working Papers 199606, Rutgers University, Department of Economics.
  9. Jennifer Hunt, 1997. "The Transition in East Germany: When is a Ten Point Fall in the Gender Wage Gap Bad News?," NBER Working Papers 6167, National Bureau of Economic Research, Inc.
  10. Robert S. Chase, 1998. "Markets for communist human capital: Returns to education and experience in the Czech republic and Slovakia," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 51(3), pages 401-423, April.
  11. Edward J. Bird & Johannes Schwarze & Gert G. Wagner, 1994. "Wage Effects of the Move toward Free Markets in East Germany," ILR Review, Cornell University, ILR School, vol. 47(3), pages 390-400, April.
  12. Ronald L. Oaxaca & Michael R. Ransom, 1999. "Identification in Detailed Wage Decompositions," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 154-157, February.
  13. Blau, Francine D & Kahn, Lawrence M, 1996. "International Differences in Male Wage Inequality: Institutions versus Market Forces," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 791-836, August.
  14. Susan N. Houseman & Katharine G. Abraham, 1995. "Earnings Inequality in Germany," Book chapters authored by Upjohn Institute researchers, in: Richard B. Freeman & Lawrence F. Katz (ed.), Differences and Changes in Wage Structures, pages 371-403 W.E. Upjohn Institute for Employment Research.
  15. David Card & John E. DiNardo, 2002. "Skill Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," NBER Working Papers 8769, National Bureau of Economic Research, Inc.
  16. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
  17. Suits, Daniel B, 1984. "Dummy Variables: Mechanics v. Interpretation," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 177-80, February.
  18. M. Burda & C. Schmidt, 1997. "Getting Behind The East-West Wage Differential: Theory and Evidence," SFB 373 Discussion Papers 1997,77, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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