Human Capital Accumulation over the Life-Cycle: Evidence from Germany’s Reunification

We study and compare the importance of human capital acquired at different stages of the life-cycle. We exploit Germany’s unique reunification episode and the sudden restructuring of East Germany’s labor market institutions and education system. We show graphical evidence that earnings, employment and wages for each East German birth cohort—scaled by the same outcomes for West German cohorts—change linearly with age at reunification. These linear exposure effects display structural breaks, i.e., changes in slope, around the ages 18 and 30 at reunification for both genders, and age 35 for females: there are significant gender differences. Exposure effects are by far the strongest for males between ages 20 and 30, where relative earnings decline at a rate of 2% per year for older cohorts. Around 40% of this effect is explained by higher college graduation rates for younger cohorts, while the remaining 60% underscores the impor- tance and long lasting impact of early career effects. For females, earnings differences are almost completely explained by employment. We document reverse exposure effects for East German women between age 5 and 30 at reunification: employment and labor force participation rates increase linearly with each additional year spent in the socialist East. This trend is reversed after age 30, with older cohort’s earnings and employment declining with each additional year spent in the East.