The rise of West German wage inequality

by on December 5, 2013 at 1:42 am in Data Source, Economics, Uncategorized | Permalink

This paper (pdf) by Card, Heining, and Kline appeared earlier this year and is published in the QJE and somehow it escaped my notice.  Here is the first part of the abstract:

We study the role of establishment-specific wage premiums in generating recent increases in West German wage inequality. Models with additive fixed effects for workers and establishments are fit in four sub-intervals spanning the period from 1985 to 2009. We show that these models provide a good approximation to the wage structure and can explain nearly all of the dramatic rise in West German wage inequality.
P.4 offers perhaps the most useful statement of the concrete results:

…two-thirds of the increase in the pay gap between higher and lower-educated workers is attributable to a widening in the average workplace pay premiums received by different education groups. Increasing workplace heterogeneity and rising assortativeness between high-wage workers and high-wage firms likewise explain over 60% of the growth in inequality across occupations and industries. Finally, we investigate two potential channels for the rise in workplace-specific wage premiums: establishment age and collective bargaining status. Classifying establishments by entry year, we find a trend toward increasing heterogeneity among establishments that entered the labor market after the mid-1990s, coupled with relatively small changes in the dispersion of the premiums paid by continuing establishments. The relative inequality among newer establishments is linked to their collective bargaining status: an increasing share of these establishments have opted out of the traditional sectoral contracting system and pay relatively low wages.

I would put it this way: there are “high human capital firms” and “low human capital firms” to a greater extent than before.  This change represents increasing German wage inequality fairly well, although it cannot be inferred that this increasing segregation causes the inequality increase.

Since newer firms reflect higher inequality and higher segregation, and I don’t foresee a major return of unionization, I take this as prima facie evidence that wage inequality in Germany (and many other places) is likely to continue to rise.  This is another example of “the great reset,” as the newer firms offer a greater glimpse into the German economic future.

By the way, it is papers like this which increase my skepticism about the signaling model of education.  The relevant signals being fed into these markets haven’t changed that much.  Wage patterns are changing a lot.

For the pointer I thank Christian Odendahl.

mulp December 5, 2013 at 1:55 am

What fraction of workers require welfare to survive in Germany?

kylind December 5, 2013 at 7:41 am

Last number I heard was about 329.000 households with a full-time worker received basic aid.

prior_approval December 5, 2013 at 8:16 am

‘and I don’t foresee a major return of unionization’

How about the future of the Manteltarifvertrag? Ver.Di and HDE have just signed an updated one, covering the sort of market where, at least in the U.S., ‘human capital value’ doesn’t count at all.

‘Der von den Arbeitgebern im Januar gekündigte Manteltarifvertrag sei unverändert wieder in Kraft gesetzt worden, betonte Ver.di. Beide Seiten einigten sich zudem auf Gehaltssteigerungen. Demnach wurden für die Monate April bis Juni 2013 zwar eine Nullrunde mit unveränderten Einkommen vereinbart. Rückwirkend zum 1. Juli des laufenden Jahres steigen aber die Bezüge der rund 220.000 Beschäftigten in Baden-Württemberg um 3,0 Prozent. Am 1. April 2014 steigen die Gehälter um weitere 2,1 Prozent. Der neue Tarifvertrag gilt rückwirkend ab April und läuft bis März 2015.’ http://www.tagesschau.de/wirtschaft/einzelhandel-tarife100.html

Much of how things work in Germany are specific, but basically, retail workers covered by this agreement are getting a 3% raise retroactive to July 1st. And the workers covered by this do not have to belong to a union, of course. Which is why it is a bit misleading to talk about ‘unions’ in a German context.

Further, though the retailer association cancelled the blanket agreement last January, they have now caved completely – next year, 220,000 retail workers will see their wages rise another 2.1%, and a new blanket agreement will be signed.

Wage inequality is a moving target – and it is possible to change circumstances through collective action involving those who actually do the work.

Germans are true believers that wealth is based on work – and that workers have every right to claim their share, with the same determination that those who do no work want to keep all the profit for themselves.

It’s what middle class based democracy looks like – though I guess that is a fading memory in the U.S. at this point.

JWatts December 5, 2013 at 10:26 am

the sort of market where, at least in the U.S., ‘human capital value’ doesn’t count at all.

That’s just a completely ridiculous claim.

prior_approval December 5, 2013 at 1:51 pm

Well, the story about how Walmart employees at one store were collecting food for other Walmart employees is just a tiny example of what Germans find incomprehensible about how American companies treat their employees. (I can’t even explain the Colbert Report on this to Germans – they simply don’t grasp the idea of a company that pays so little its employees qualify for food stamps and taxpayer funded health care. Barry Ritholz – ‘Wal-Mart, the nation’s largest private sector employer, is also the biggest consumer of taxpayer supported aid. According to Florida Congressman Alan Grayson, in many states, Wal-Mart employees are the largest group of Medicaid recipients. They are also the single biggest group of food stamp recipients. Wal-mart’s “associates” are paid so little, according to Grayson, that they receive $1,000 on average in public assistance. These amount to massive taxpayer subsidies for private companies.’ http://www.bloomberg.com/news/2013-11-13/how-mcdonald-s-and-wal-mart-became-welfare-queens.html

Though it isn’t as if too many Germans actually know much about Walmart. A company that left Germany right around the time that the German courts – and everyone else – laughed derisively at Walmart’s attempt to enforce a rule that its employees could not have romantic relationships with one another.

And how do wage increases in the American retail sector look at this point?

JWatts December 5, 2013 at 3:27 pm

they simply don’t grasp the idea of a company that pays so little its employees qualify for food stamps and taxpayer funded health care.

From above:
“What fraction of workers require welfare to survive in Germany?”
“Last number I heard was about 329.000 households with a full-time worker received basic aid.”

Floccina December 5, 2013 at 5:22 pm

These amount to massive taxpayer subsidies for private companies.

How is it that the subsidy is to the company rather than to the person receiving SNAP etc.?

Daniel Dostal December 5, 2013 at 5:32 pm

The reasoning is that the company is only able to pay so little because of SNAP. Were SNAP not to exist, all Walmart employees who collect SNAP would instead receive those benefits directly from Walmart. Thus rather than being a subsidy to the worker, it is Walmart that is truly benefiting. No idea what data backs this up other than Walmart’s profits and helping their employees apply for benefits.

I see the problem as a temporary systemic issue as we transition into automated delivery. Walmart won’t exist once drone delivery is normative. Average is over, ya?

T. Shaw December 5, 2013 at 8:26 am

NEWS FLASH. The reunification process was completed 3 Oktober 1990 – before some of you were born.

Der Bundesrepublik Deutschland ist kaput.

Grammar Nazi December 5, 2013 at 8:28 am

5 words, 2 mistakes. Impressive.

JWatts December 5, 2013 at 10:28 am

It’s even more impressive that you managed to make at least 3 grammar errors in the 5 words you posted. Or would ironic be the better term?

Mike December 5, 2013 at 12:57 pm

Did you know that “grammar” isn’t an adjective?

JWatts December 5, 2013 at 5:07 pm

Did you know that “grammar” isn’t an adjective?

Touche!

prior_approval December 5, 2013 at 1:51 pm

Care to list the 3 mistakes?

Adrian Ratnapala December 5, 2013 at 3:19 pm

G.M’s post contained no sentences. Personally I would just count that as one big mistake. I prefer to write actual sentences with lots of little mistakes in them.

Adrian Ratnapala December 5, 2013 at 3:19 pm

Although my actual mistakes are often not that little.

watchmaker December 5, 2013 at 9:45 am

But surely many non-education factors have changed. I’d think they are far more likely to create increased inequality than educational fads of the day.

It could be that the traits for which degrees signal are more important now.

A Definite Beta Guy December 5, 2013 at 10:49 am

I do not follow the logic on signalling.

Particularly this:
“The relevant signals being fed into these markets haven’t changed that much. ”
Assuming this is true (I do not, assuming that what we read about college admissions to top universities becoming hyper-competitive is true), the demand for the traits underlying the signal has altered.

Thus the wage patterns have altered.

-Assume it is impossible to increase physical fitness and it is distributed normally across the population.
-Assume men 3 SDs above mean can pass the Hunger Games Marathon or whatever.
-Assume demand for running speed increases substantially
Result is that men 3 SDs above men will increase dramatically. Firms will begin asking for your Hunger Games medal at interviews. Men who have not completed the Hunger Games Marathon, who are capable of doing so, will run it in order to improve their chances of getting a job. This does not mean that the Hunger Games Marathon increases their running speed (we have already assumed that to be impossible)

Men between 1 and 2 SDs above mean may indeed be useful, but are ZMP because on average any man below 2SD is a net negative producer of such colossal value that the entire enterprise breaks down.

Thus men need to develop additional signalling ability in this 1-2 SD range. This does not indicate improved running ability. Only increased segmentation.

Am I missing something?

Rob December 5, 2013 at 12:16 pm

+1.

Tyler, could you please explain what you meant? I’m genuinely curious and don’t follow your reasoning.

Therapsid December 5, 2013 at 1:20 pm

+2

genauer December 5, 2013 at 11:08 am

memberhip in the metal worker union in Germany is rising,
bargaining power is increasing at unemployment of 5.2%

Germany now is introducing a national minimum wage, at 11.5 $ not to be sneezed at, because of observed abuses.
temporary work becomes more limited.

Slight increases in general net income inequality until 2008 have already been largely reversed, when family size etc is properly taken into account, like the DIW SOEP panel.

What the paper takes not properly into account, is that in the lower income sector in Germany, a larger fraction is non-wage (Kindergeld, Betreuungsgeld, universal health care, etc.) and especially provides a stable minimum (with HARTZ IV 35 k$ for a family of 4 not so bad either, no health payments subtracted) in the case of longer unemployment.

yo December 5, 2013 at 1:47 pm

‘Slight increases in general net income inequality until 2008 have already been largely reversed’ – is that pre-tax or post-tax? I used to think German median wage earners got hit hard in take home pay since 2008 due to
1. soaring electricity bills (a “green tax” averaging EUR 200/person/year if you will)
2. cold progression (which has been reducing the pre-tax 2-3% raises of late to EUR 800/year)
4. expectations of heavy increases in social security/pension contributions (with the new Merkel government promising no tax increases but aysing nothing about raising the social security %)
5. Merkel’s VAT increase, 16 to 19%
All of these tax increases, except perhaps 3., have been pretty regressive in my view, affecting mainly the 30th to 80th percentile, partly due to the Beitragsbemessungsgrenze.

yo December 5, 2013 at 1:50 pm

Sorr<, part of the post went missing, it should have read the following:

‘Slight increases in general net income inequality until 2008 have already been largely reversed’ – is that pre-tax or post-tax? I used to think German median wage earners got hit hard in take home pay since 2008 due to

1. soaring electricity bills (a “green tax” averaging EUR 200/person/year if you will)

2. cold progression (which has been reducing the pre-tax 2-3% raises of late to EUR 800/year)

4. expectations of heavy increases in social security/pension contributions (with the new Merkel government promising no tax increases but saying nothing about raising the social security %)

5. Merkel’s VAT increase, 16 to 19%

All of these tax increases, except perhaps 3., have been pretty regressive in my view, affecting mainly the 30th to 80th percentile, partly due to the Beitragsbemessungsgrenze.

JWatts December 5, 2013 at 3:34 pm

A Preview functionality would be really nice.

collin December 5, 2013 at 11:39 am

How much is stagant wages a function of integrating East Germany? (Which would be the same as the Mexico fully integrating with the US from a n economic wage stand point?) That certainly was a wage shock and Scott Summer points out in 2000 there society was not looking as good as today.

Anyway, I do find it that the most competitive large European also has the lowest birth rate of similar size nations. (Although Italy is close.) If a competitive society needs to control working class wages, how do you suggest the working class can afford more children?

genauer December 5, 2013 at 11:59 am

this was not just about integrating East Germany.

We have open borders throughout the whole EU, with the exception of the funny islands UK and Ireland. With countries like Bulgaria, with wages about 1/4th of ours.

Manufacturing went down from 50% in the border regions to 20%, and we had to squeeze 100 % of GDP out of our people to finance reunifications

That left some scars, and hard people.

mulp December 5, 2013 at 2:28 pm

heard someone on npr discuss the US doing a buyout of Canada to add it as States. It referenced Germany and indicated a standard Wall Street LBO of Canada would have the same relative cost of what was effectiveky the West doing an LBO of the East.

mark December 5, 2013 at 2:17 pm

On a pre-tax-and-transfer basis, the Gini coefficient of each of France and Germany is virtually identical to that of the US. It is only on a post-tax and transfer basis that they lower their Gini. Indicating that the forces driving income inequality are transnational and factors like unionization are irrelevant.

The data can be found on the OECD website.

JWatts December 5, 2013 at 3:36 pm

That would be some interesting data to see. I’m not sure it’s worth my time to try and pull it out of the OECD data. Or is it directly accessible?

genauer December 5, 2013 at 4:36 pm

this is of course post tax and transfer, and accounting for household size, like I said DIW SOEP.
VAT of 19% was also CDU & SPD together, and not just Merkel, and only for non-food.

Energy tax is of course a problem, which right&left have to adress without the fanatic greenies. But (close) majorities of people have voted for this in 1998, 2002, 2005, (2009), 2013. The SPD target for renewable was 70%

Social contributions would actually fall by 0.6% next near, if it wouldnt be used to clean up legacy stuff, but might be somewhat dicey with respect to the basic law

The bottomline is, that the paper is 4 years behind the curve, and that most contributors in this blog don’t know a thing about what is actually happening and who demanded and decided what. Nor have the slightest understanding of what is done why.

I just got aware, that these discussion here are completely useless nonsense, discussing age old data between people who do not know anything about what they are talking. Completely irrelevant to the discussion between the relevant people, Germans and the here and now coalition talks.

yo December 6, 2013 at 4:01 am

You’re probably right about these discussions here being completely useless nonsense.

I looked into the DIW website and skimmed through WP #492 which says this somewhere about taxes: “The total burden is highly progressive in the lower half of the income distribution, but the progression flattens significantly between the sixth and ninth income deciles. It is worth noting that the overall tax burden of the highest income decile, at only 35.5 percent, is lower than for the sixth decile.”

My own feeling of increasing tax burdens is probably a function of me being a 6th decile German taxpayer.

I thought that the real earnings of the poorest would have declined too since H4 hasn’t been increased in ages. Seems that’s only partly the case, probably offset by the fact that more people work which makes them earn more than H4 if only marginally.

genauer December 6, 2013 at 10:40 am

it is people like you who are squeezed the most.

You might nevertheless my post below useful.

Floccina December 5, 2013 at 5:16 pm

Is this about the discovery of the 10x engineer?

When I was managing restaurants back in the early 1980s I noticed that some dish washers did 2 or 3 times as much work as others and that we never paid them that much more (1.5x more at the most) rather they would be given an opportunity to move up which they would sometimes fail at their new job. I found this perplexing. A little later people started talking about the value of paying more to hire the best workers. Is this a big cause of all this.

genauer December 6, 2013 at 10:49 am

My last words here were a little harsh, but I want to point out the following:

a) When you look at the better statistics, like

http://www.diw.de/documents/publikationen/73/diw_01.c.410475.de/12-43-1.pdf

- the changes are not dramatic, and are declining since 2006, see “Abbildung” Fig. 3

- -Gini coefficient is misleading to a degree to make it nearly useless, compare Fig. 4 to 3

- Especially capital gains, which are now taxed substantially higher, but show up as income, distort the picture on the high side (upper 10%), and the higher non-market distributions and increased duty to file tax returns for lower income / pensioners distorts it on the lower 15%,. Every time displaying the opposite of how that real changes net income.

b) that the changes we did in Germany were the exact opposite of usual party politics

- The “conservative” / “neo-liberal” CDU/FDP, in power until 1998, did raise taxes up to 53% * (1+ 7.5% Solidaritätszuschlag + 9% church tax) = 57 or 62%, triggering all kinds of negative side effects (pseudo Selbstständige, driving high worth folks out of the country, mass abandonment of church membership / co –financing of social services)

- The “left” social democrat SPD / green coalition reduced marginal tax rates in 2005 to 42% * (1 + 5.5% Solidaritätszuschlag) = 44%. (And we have no state taxes in Germany, and local property tax is very small, for people in the US to compare). A pretty substantial change, but necessary. With the conservative CDU the marginal tax rate went up by 3% again, after 2006

c) the paper is discussing changes we (speaking as a German, identifying with all my governments, in general, a left/green government specifically) made in 2003

We are now doing changes to address social shortcomings (low pension contributions in the east), which will become more clearly only 5 to 10 years down the road, based on our projections

d) these changes have to be in agreement with the constitution, EU law, and also have to be fair and just to our eastern European neighbors, especially in the Balkans. Without overburdening people like “yo” above. Gini coefficients are pretty irrelevant to this.

Michael Sommer, head of the german unions (DGB), a guy who spend a kidney for his wife, SPD member is coming out (http://www.handelsblatt.com/politik/deutschland/spd-parteitag-dgb-chef-wirbt-fuer-grosse-koalition/9084824.html) in favor of the present coalition treaty, representing 80% of the vote.

Germany is ticking very differently to the US. The unions have half the board seats, and they understand the business and global implications.

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