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Income inequality in Germany – A rapid increase in the skill premium for young medium- skilled workers

The rise in inequality in many OECD countries over the last decades has triggered a rich body of academic work. Scholars agree in general that recent changes in inequality are mainly driven by inequality of labor incomes which in turn are closely related to skill premiums. In this paper, we ask whether skill-biased technological change and, in particular, shifts in the supply of different skill groups – both along the age and the education dimension – can explain the observed evolution of skill premiums in Germany over the last three decades.

Our estimations based on a model comprising three skill and two age groups show that linear technological progress and observed changes in skill supplies go a long way in explaining the peculiar patterns of skill premiums in Germany. In particular, our model is able to explain the pronounced increase in the wage premium of young medium-skilled worker from 10% in the 1980s to 25% in the 2000s very well. Premiums for both young and old high-skilled workers show no systematic upward or downward trend despite a pronounced increase in their relative demands. Our framework suggests that this was because the corresponding supply of high-skilled workers has kept pace with increased demand. The share of high-skilled workers among all full-time workers has tripled from 5% at the beginning of the 1980s to 15% at the end of the 2000s and continues to increase.

Our cohort analysis suggests that the rapid increase in the skill premium for young medium- skilled workers is rooted in a pronounced change in the educational attainment of the native (West-) German population that occurred for cohorts born after 1965 and which reversed previous trends in the acquisition of different types of education. The share of individuals with completed vocational training decreased strongly and was as large for the 1980s cohorts as it was for the 1940s cohorts while the share of individuals with tertiary education increased to unprecedented levels and the long-term decline in the share of low-skilled individuals came to a hold. All in all, our study suggests that a considerable part of recent changes in earnings inequality between different skill groups in Germany are the result of longer term educational choices of the population and hence, ultimately, driven by labor supply.



Chosen excerpts by Job Market Monitor. Read the whole story at Educational choices can help explain income inequality in Germany | IZA Newsroom


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