Can a Task-Based Approach Explain the Recent Changes in the German Wage Structure?

Even though wage inequality in West Germany started to rise at the top of the wage distribution in the 1980s, this rise was delayed for about ten years at the bottom. Our paper investigates the changes in the German wage structure for full–time working males from 1999 to 2006. We find a noticeable increase of wage inequality during this time period. The difference of the log wages, measured at the 80th and the 20th percentile, rises by about 8 percentage points. Wage inequality increases by about the same extent both at the bottom and the top of the wage distribution. The most prominent explanation in the literature for the increase in wage inequality in the US and the UK is skill–biased technical change (SBTC) resulting in an increasing demand for more highly skilled labor (see the survey by Katz and Autor, 1999). The increase in demand is stronger than the parallel increases in the supply of more highly skilled labor. The developments in Germany for the 1980s are consistent with the SBTC hypothesis (Fitzenberger, 1999), if one allows for the possibility that growing wage inequality in the lower part of the wage distribution is prevented by labor market institutions such as unions and implicit minimum wages implied by the welfare state. Our analysis builds upon the task–based approach introduced by Autor et al. (2003), as implemented by Spitz-Oener (2006) for Germany. Autor et al. (2003) operationalize the way technology affects the labor market through the tasks workers perform at their job. This task–based approach argues that technological change results in a substitution of routine tasks by computers and other machines. Therefore, demand for workers performing nonroutine tasks increases. For the US, Autor et al. (2003) analyze data at the occupational level and confirm that the employment in jobs involving routine tasks has fallen considerably. Spitz-Oener (2006) documents similar changes in tasks for Germany until the end of the 1990s as in the US. She uses the four waves of the "Qualification and Occupational Career" survey from the late 1970s to the late 1990s, which includes explicit information about the performing tasks at the job. A similar survey called "Working-Population-Survey" was redone in 2006 involving comparable task description. Our study here is the first study to make simultaneous use of the 2006 and the 1999 survey and the first study to analyze the most recent changes in wage inequality for full–time working males in Germany in light of the task–based approach. Even though the task–based approach is successful in explaining changes in the distribution of skill groups and the change in occupations, it is difficult to rationalize the fairly large stability of the wage structure in Germany at the bottom of the distribution until the mid 1990s based on this hypothesis. Therefore, it is of interest to investigate whether a task–based approach can rationalize the recent rise in wage inequality in Germany. Furthermore, in addition to the task categories used by Spitz-Oener (2006) for Germany, we also use two proxies for job complexity. Changing from routine to non-routine tasks is likely to increase job complexity because workers have to perform different tasks simultaneously and the necessity to responding flexibly to changing demands at jobs has increased. We suggest a different operationalization of the five task categories used by Spitz-Oener (2006), which allows us to separately identify the wage effects of task assignment in those five task categories from our two proxies for job complexity. Finally, we perform a Blinder–Oaxaca type decomposition of the changes in the entire wage distribution between 1999 and 2006 into the separate effects of personal characteristics and task assignments. The decomposition results show that the changes in personal characteristics explain some of the increase in wage inequality whereas the changes in task assignments strongly work towards reducing wage inequality. The coefficient effect for personal characteristics works towards an increase in wage inequality in the upper part of the wage distribution. The coefficient effect for the task assignments on the contrary shows an inverted U–shaped pattern. We conclude that the task–based approach can not explain the recent increase in wage inequality among male employees in Germany. Only at the bottom of the wage distribution, the change in task coefficients has contributed to the increase in wage inequality. Thus, wages for the tasks demanded in low wage jobs have fallen disproportionately over time. The latter can be rationalized in light of the polarization hypothesis by a low degree of complementarity between low–wage jobs and high–wage jobs (Autor and Dorn, 2008). Furthermore, our findings suggest to analyze the impact of institutional changes, such as deunionization (see Dustmann et al., 2007) and the labor market reforms, as potential explanations for the recent increase in wage inequality.

Antonczyk, Dirk, Bernd Fitzenberger and Ute Leuschner (2008), Can a Task-Based Approach Explain the Recent Changes in the German Wage Structure?, ZEW Discussion Paper No. 08-132, Mannheim.