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Dynamics of Earnings and Hourly Wages in Germany

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Author Info
Myck, Michal () (DIW Berlin)
Ochmann, Richard () (DIW Berlin)
Qari, Salmai () (WZB - Social Science Research Center Berlin)

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Abstract

There is by now a vast number of studies which document a sharp increase in cross-sectional wage inequality during the 2000s. It is often assumed that this inequality is of a "permanent nature" which in turn is used as an argument calling for government intervention. We examine these claims using a fully balanced panel of full-time employed individuals in Germany from the German Socio-Economic Panel for the years 1994–2006. In line with previous studies, our sample shows sharply rising inequality during the 2000s. Applying covariance structure models, we calculate the fraction of permanent and transitory wage and earnings inequality. From 1994 on, permanent inequality increases continuously, peaks in 2001 and then declines in subsequent years. Interestingly the decline in the permanent fraction of inequality occurs at the time of most rapid increases in cross-sectional inequality. It seems therefore that it is primarily the temporary and not the permanent component which has driven the strong expansion of cross-sectional inequality during the 2000s in Germany.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3751.

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Length: 26 pages
Date of creation: Oct 2008
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Handle: RePEc:iza:izadps:dp3751

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Related research
Keywords: variance decomposition; covariance structure models; earnings inequality; wage dynamics;

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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References listed on IDEAS
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  1. Johannes Gernandt & Friedhelm Pfeiffer, 2007. "Rising Wage Inequality in Germany," SOEPpapers 14, DIW Berlin, The German Socio-Economic Panel (SOEP). [Downloadable!]
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  2. Martin Biewen, 2005. "The Covariance Structure of East and West German Incomes and its Implications for the Persistence of Poverty and Inequality," German Economic Review, Blackwell Publishing, vol. 6(4), pages 445-469, November. [Downloadable!] (restricted)
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  3. Richard V. Burkhauser & John G. Poupore, 1997. "A Cross-National Comparison Of Permanent Inequality In The United States And Germany," The Review of Economics and Statistics, MIT Press, vol. 79(1), pages 10-17, February. [Downloadable!] (restricted)
  4. Esfandiar Maasoumi & Mark Trede, 2001. "Comparing Income Mobility In Germany And The United States Using Generalized Entropy Mobility Measures," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 551-559, August. [Downloadable!] (restricted)
  5. Haider, Steven J, 2001. "Earnings Instability and Earnings Inequality of Males in the United States: 1967-1991," Journal of Labor Economics, University of Chicago Press, vol. 19(4), pages 799-836, October. [Downloadable!] (restricted)
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  6. Dickens, Richard, 2000. "The Evolution of Individual Male Earnings in Great Britain: 1975-95," Economic Journal, Royal Economic Society, vol. 110(460), pages 27-49, January. [Downloadable!] (restricted)
  7. Clark, Todd E, 1996. "Small-Sample Properties of Estimators of Nonlinear Models of Covariance Structure," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 367-73, July.
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  8. Baker, Michael & Solon, Gary, 1999. "Earnings Dynamics and Inequality Among Canadian Men, 1976-1992: Evidence from Longitudinal Income Tax Records," Analytical Studies Branch Research Paper Series 1999130e, Statistics Canada, Analytical Studies Branch. [Downloadable!]
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  9. Stefan Bach & Giacomo Corneo & Viktor Steiner, 2008. "Effective Taxation of Top Incomes in Germany, 1992-2002," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  10. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-45, March. [Downloadable!] (restricted)
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  11. Lillard, Lee A & Weiss, Yoram, 1979. "Components of Variation in Panel Earnings Data: American Scientists, 1960-70," Econometrica, Econometric Society, vol. 47(2), pages 437-54, March. [Downloadable!] (restricted)
  12. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier. [Downloadable!] (restricted)
  13. Magnus Gustavsson, 2007. "The 1990s rise in Swedish earnings inequality -- persistent or transitory?," Applied Economics, Taylor and Francis Journals, vol. 39(1), pages 25-30, January. [Downloadable!] (restricted)
  14. Daly, Mary C. & Valletta, Robert G., 2008. "Cross-national trends in earnings inequality and instability," Economics Letters, Elsevier, vol. 99(2), pages 215-219, May. [Downloadable!] (restricted)
  15. Christian Dustmann & Johannes Ludsteck & Uta Schönberg, 2007. "Revisiting the German Wage Structure," IZA Discussion Papers 2685, Institute for the Study of Labor (IZA). [Downloadable!]
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  16. Stefan Bach & Giacomo Corneo & Viktor Steiner, 2007. "From Bottom to Top: The Entire Distribution of Market Income in Germany, 1992 - 2001," Discussion Papers of DIW Berlin 683, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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