The unbearable stability of the German wage structure: Evidence and interpretation

Abstract

This paper uses micro data from the German Socio-Economic Panel to document that the wage structure in West Germany was remarkably stable over the period 1984-97, with little variation over time in wage or earnings inequality among and within different skill groups. The paper investigates a number of possible explanations for the stability of the wage structure and concludes that it is attributable to institutional factors rather than market forces. Consequently, the rigidity of relative wages despite relative shifts in labor demand that favor skilled workers has resulted in sharp declines in employment rates for unskilled workers. The micro evidence is also shown to have important implications for interpreting trends in wage shares, capital-labor ratios, and aggregate unemployment. © 2004 International Monetary Fund.