The rise of West German wage inequality

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.


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