Assessing Intergenerational Earnings Persistence Among German Workers

The vitality and stability of our democracy - as well as the economy - eventually depend on the social permeability of our society. (Horst Köhler, German Federal President, 29.12.2007, own translation) This statement draws attention to the strong meritocratic believes concerning the equality of opportunity that govern public debates. This is especially true for the education system. But, does this general concern translate into a society in which one's economic success in the labor market is independent of the family born into? And if so, to what degree? In this study, we investigate intergenerational persistence among German workers. Our measure of labor market success is real monthly earnings before taxes and social security payments. The relationship between fathers' and sons' labor market earnings is assessed with samples drawn from the German Socio-Economic Panel (SOEP) 1984-2006. We introduce a novel sampling procedure that allows us to observe father-son pairs at a rather similar stage of their lifecycle. From a variety of microeconometric estimates (utilizing both OLS and IV methods) we suggest that the best point estimate of intergenerational earnings persistence among German workers is one-third. Hence, if in the period of investigation a father's permanent labor market earnings increased by 10 percent, the son's long-run economic status grew by 3.33 percent. Evaluated at the mean of our sample of sons (1,937€), this implies a step up of 63€ for the son. This number indicates a lower degree of mobility (and a higher degree of persistence) in Germany in contrast to preceding studies. In an international perspective, the intergenerational earnings persistence in Germany seems to be lower compared to the United States and higher compared to Sweden. To summarize: there still seems to be substantial intergenerational earnings mobility among German workers, but more persistence than previous research suggested.

Eisenhauer, Philipp and Friedhelm Pfeiffer (2008), Assessing Intergenerational Earnings Persistence Among German Workers, ZEW Discussion Paper No. 08-014, Mannheim.