The structure of wages is crucial for economic performance and the evolution of employment in particular; see the handbook article of Katz and Autor (1999) and the more recent survey of Autor, Katz, and Kearney (2005b). With the growing availability of large micro data sets not only the wage level, but also the degree of wage dispersion or compression has received increasing attention.
The evolution of the West German wage structure between the mid-1970s and the mid-1990s has been extensively studied. By and large, the wage structure has been found to be relatively compressed in international comparison and rather stable over time; see Fitzenberger (1999) and Prasad (2000) and the literature cited therein. Returns to human capital components as well as residual wage inequality showed fairly little variation. In face of an ongoing skill-biased technical change (Acemoglu, 2002), this “unbearable stability” (Prasad, 2000) is considered a key aspect for the growing unemployment among low-skilled workers and it is frequently attributed to institutional rigidities.
Studies of the East German wage structure report an even higher degree of wage compression in the late years of the GDR, reflecting the egalitarian doctrine of the socialist system; see Krueger and Pischke (1995). This finding of strong wage compression still holds for the early years after the German unification. Exceptionally flat age-earnings or experience-earnings profiles suggest that experience accumulated under the old system is poorly remunerated afterwards. The unification shock led to a massive depreciation of human capital. However, as post-unification labor market cohorts started to age, wage dispersion increased, catching up to the West German level; see Franz and Steiner (2000) and Burda and Hunt (2001).
More up-to-date data lately allow to trace the evolution of the wage structure toward the turn of the century. Recent evidence from survey data in Gernandt and Pfeiffer (2006) and from administrative data in Möller (2005) suggests that inequality has in fact been rising in both East and West Germany. In this paper, I employ the recently available regional file of the IAB employment sample (IABS) 1975–2001 for a comprehensive description of the structure of wages for different labor market groups in the first decade after the German unification.
An inspection of year-specific unconditional wage distributions for the different groups generally supports the notion of rising wage inequality. As measured by the interquintile range QD8020, in the year 1992 dispersion was lower in East Germany than in West Germany, but it was even higher by the year 2001. The increase was highest for fulltime working women in East Germany, for whom QD8020 went up by remarkable 25 log percentage points. Moreover, the larger part of the increase in dispersion among women happened in the lower parts of the respective distributions. Dispersion among men increased disproportionately in the upper parts, though. Convergence in wage levels between East and West Germany has essentially not been achieved.
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