Earnings inequality and working hours mismatch

Based on data from the German Socio-Economic Panel, we document a significant rise in monthly earnings inequality between 1993 and 2018. The main contributors are inter-temporal increases in working hours inequality and increases in the covariance between working hours and hourly wages, while changes in the distribution of hourly wages play a minor role. Applying a novel double decomposition technique reveals that these results are particularly pronounced in the growing groups of female employees and service sector employees. If employees had been able to realize their desired optimal working hours, the increase in inequality would have been more moderate. This is mainly due to the fact that employees with low hourly wages work less than desired, a finding that is reinforced over time—even after controlling for various covariates.