Has Earnings Inequality in Germany Changed in the 1980s?

The development of the West German earnings distributionin the 1980's is analysed on the basis of both the German Socio-EconomicPanel and micro-data from the Employment Register of the FederalLabour Office. We find that earnings inequality in Germany hasincreased very little in the 1980's, if at all. It is shown thatthe marked increase in earnings inequality found in previous studiesbased on the register data is a statistical artifact related toa change in the coding of the earnings data. Our decompositionanalysis based on estimated earnings functions reveals that therelative stability of the German earnings distribution in the1980's has not resulted from large compensating changes in thecomposition of the labour force on the one hand, and changes inthe returns to human capital on the other. While both of thesecomponents have changed little in the observation period, theformer rather than the latter component has contributed to thesmall increase in earnings inequality observed in the registerdata. If anything, the earnings differential between skilledand unskilled workers has become smaller during the 1980's, whilewithin-inequality has contributed very little to changes in inequality. Overall, the empirical results of this study seem compatiblewith an institutional explanation of the stability of the Germanearnings distribution.

Steiner, Viktor and K. Wagner (1996), Has Earnings Inequality in Germany Changed in the 1980s?, ZEW Discussion Paper No. 96-32, Mannheim.