Skill Premiums and the Supply of Young Workers in Germany

In this paper, we study the development and underlying drivers of skill premiums in Germany between 1980 and 2008. We show that the significant increase in the medium-to-low skill premium since the late 1980s was almost exclusively concentrated among workers aged 30 or below. Using a nested CES production function framework which allows for imperfect substitutability between young and old workers, we show that changes in relative labor supplies can explain these patterns very well. A cohort-level analysis reveals that distinct secular changes in the educational attainment of the native population are the primary source of the declining relative supply of medium-skilled workers in Germany. Low-skilled immigration, in contrast, only plays a secondary role in explaining the rising lower-end wage inequality in Germany over recent decades.