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Changing fortunes during economic transition: Low-wage persistence before and after German unification

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  • Gürtzgen, Nicole
  • Nolte, André

Abstract

This paper studies whether the transition from a centrally planned to a market economy offers new perspectives for those who, in economic terms, were relatively deprived under the old regime. Previous empirical research on this question has been limited by the availability of representative longitudinal micro-data that track individuals' labour market careers across different political regimes. Our study seeks to fill this research gap by looking at the transition of Eastern Germany following German Unification. Using a unique large-scale German administrative data set, we measure individuals' relative economic position by exploiting information on whether individuals were in the bottom of the pre-unification wage distribution. We then address the question of how workers' low or high-wage status determines their wage and labour market status within and across different regimes. We document strong evidence of a dynamic selection process into low-wage employment after Unification. Furthermore, consistent with a weak connection between individuals' true productivity and their pre-unification low-wage status, the extent of across regime state dependence is found to be small in magnitude and appears to vanish over time. For males, the small extent of across regime dependence is found to be most pronounced among the medium and high-skilled, suggesting the depreciation of general human capital as a potential explanation.

Suggested Citation

  • Gürtzgen, Nicole & Nolte, André, 2016. "Changing fortunes during economic transition: Low-wage persistence before and after German unification," ZEW Discussion Papers 16-028, ZEW - Leibniz Centre for European Economic Research.
  • Handle: RePEc:zbw:zewdip:16028
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    1. Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Truger, Achim & Wieland, Volker, 2019. "Den Strukturwandel meistern. Jahresgutachten 2019/20," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201920.

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    More about this item

    Keywords

    Low Pay Dynamics; Economic Transition; State Dependence;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • P21 - Economic Systems - - Socialist Systems and Transition Economies - - - Planning, Coordination, and Reform
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions

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