East-West German Wage Convergence - How far have we got ?

East-west German wage convergence in the period 1990 to 1995 is analyzed on the basis of the German Socio-Economic Panel. Empirical wage equations show that the west German wage structure has remained fairly stable in the 1990s, whereas in east Germany it has changed substantially since unification. Our decomposition analysis based on the estimated wage equations shows that the mean east-west German wage differential is almost completely accounted for by differences in estimated coefficients of the wage equations, whereas regional differences in human capital endowments and the employment structure are quantitatively of little importance. East-west wage convergence is thus mainly related to changes in the coefficient effect, the components of which have changed considerably over time. Six years after unification, most of the coefficient effect for males is related to regional differences in the returns to human capital, while differences related to firm-size and industry rents contribute relatively little to the mean wage differential. For females, regional differences in the returns to human capital still play only a minor role.

Steiner, Viktor and K. Wagner (1997), East-West German Wage Convergence - How far have we got ?, ZEW Discussion Paper No. 97-25, Mannheim.