Wage Growth and Inequality Change During Rapid Economic Transition

Tulane University
Source: RePEc


East Germany, a unique socialist command economy prior to the 1990s, underwent rapid transition to a market-oriented economic system. This transition has been of intense interest given the environment of Eastern Germany vis-a-vis Western Germany, a setting different from most other transition economies. However, changes in the Eastern wage structure during transition demonstrates considerable similarity to that occurring in other transition economies. During the course of this transition, East Germany experienced big increases in both its wage level and wage dispersion. From 1990 to 2000 real wages in East Germany for men aged 20-60 rose by 118%, while various inequality measures indicate an increase in wage inequality of 25 to 61%. This paper studies the causes of this growth in wages and the changes in wage inequality, the first two moments of the wage distribution. We find that changes in the wage structure due to the transition explains most of wage growth and inequality change in East Germany. Most of the increases occur at the beginning of the transition. We compare our 1990-2000 results for East Germany to West German wage earners during the same period in order to investigate whether convergences took place in terms of mean (level) and dispersion (inequality).

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    • "Data on West Germany covered the period from 1985 – 1993, whereas data for East Germany covered the period from 1990 – 1993. Although wage inequality has risen in East Germany after reunification, inequality levels remained well below their West German counterparts as indicated by Gang et al. (2006) and Gang and Yun (2003). That observation confirms that lower gender pay gaps are likely to be associated with lower levels of inequality as mentioned before. "
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    ABSTRACT: In this article I analyze the changes in the gender wage gap in the western region, eastern region and in reunified Germany during the period 1999 – 2006. I use data from the German Socio-Economic Panel and implement two alternative decomposition methodologies; the Juhn, Murphy and Pierce (1991) decomposition, and a methodology that totally differences the Oaxaca-Blinder (1973) decomposition, found in Smith and Welch (1989). I conclude that most of the increase in the gender wage gap occurred during a period of remarkably rising wage inequality and argue that both trends are caused simultaneously by the same set of factors. Furthermore, German women were, on average, treated favorably in the returns to their educational attainment, potential experience and tenure compared men, and that the increasing gender wage gap was mainly due to changes in the gender differentials in human capital endowments, particularly worker’s potential experience, changes in the gender distribution across industries, company sizes and occupational positions and to changes in discrimination in the returns to job-specific training.
    SSRN Electronic Journal 04/2010; DOI:10.2139/ssrn.1597147
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    • "Although I do not disagree with that view, figures (10) to (12) clearly show a rather diverging trend between real hourly wages and wage inequality after 1999, suggesting that indeed, " There is no a priori relationship between wage growth and changes in wage inequality " Gang el al. (2006). In other words, as wages showed a relatively mild positive trend, wage inequality increased rapidly during 1999 -2006 in the west and in the east alike. "
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    ABSTRACT: "In this article, I analyze the changes in wage inequality in the eastern region, western region and reunified Germany a decade after reunification. For that purpose, I use data from the German Socio-Economic Panel for the period 1999-2006, and implement the decomposition methodologies of Fields (2003) and Yun (2006). I find that during the sub-period 1999-2002 each of the characteristics effect, coefficient effect and residual effect contributed to the increasing levels of wage inequality in Germany. On the other hand, the relative stability in wage inequality during the sub-period 2002-2006 was caused by the fact that the characteristics effect and the residual effect influenced wage inequality negatively, whereas the coefficient effect maintained a positive influence in both the western region, eastern region and in reunified Germany alike. Hence, I conclude that after 1999, changes in wage inequality in Germany can be explained by both; changes in workers characteristics and changes in the wage structure, and not by changes in the wage structure alone, as the case has been during the transition process in the first decade after reunification."
    SSRN Electronic Journal 01/2010; DOI:10.2139/ssrn.1551188
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    ABSTRACT: Transition countries are believed to have undergone significant social and economic structural changes. Indeed, the early transition resulted in the modification of ownership structure and recognized processes of labor reallocation as well as in rapid educational booms in many Central and Eastern European countries. In this paper we shed some light on the changes regarding the size and composition of the middle class in two transition countries, Croatia and Poland, in the period 1995-2008. In general, the size of the middle class – as defined by individuals with wages around the median – decreased in Poland roughly between 2000 and 2001, while in Croatia it returned to its initial, mid-1990s levels despite a temporary drop in the size. Our analysis of consecutive Labor Force Surveys suggests that the composition of the middle class underwent no serious structural changes over the past decade. The most important finding is that highly skilled workers have moved above the position of middle class in Croatia, while in Poland they have mostly extended the middle class.
    Croatian Economic Survey 02/2010; 12(1):9-44.
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