The persistent pay gap between Easterners and Westerners in Germany: A quarter-century after reunification

Abstract

A quarter of a century after Germany's reunification, Eastern Germans still earn substantially less than Western Germans. This paper revisits the German wage differential and isolates the effect of differing returns to human capital endowments, the possibility of a location effect, and human capital depreciation on the regional wage gap. While the endowment effect, location effect, and human capital depreciation jointly account for the wage differential between Easterners and Westerners living in the West, the same does not hold true for individuals settled in the East, where part of the wage gap remains unexplained.