Wage differentials between East and West Germany: are they related to the location or to the people?

Abstract

Despite rapid economic integration and massive help from the Federal Government, large wage differences between East and West Germany still persist. We ask whether those differences are related to disadvantageous locational conditions in East Germany or could be found in the characteristics of the people living there. This article analyses income adjustment of East–West migrants based on the German Socio-Economic Panel (GSOEP), 1990–2008. Because migrants earned their income in both East and West Germany, the effect of the location can be identified. The results indicate that the wage differences cannot be attributed to the people.

Acknowledgements

The authors thank Christian Peukert for research assistance and the editor of this journal and two anonymous referees for very helpful comments on an earlier version of the article.

Notes

¹BMVBS (2009) and Smolny (2009, 2010).

²See for example, Burda and Hunt (2001), Sinn (2002), Burda (2006) and Snower and Merkl (2006).

³See for example, Burda and Schmidt (1997), Hunt (2001) and Eichler and Lechner (2002).

⁴Burda (1993), Van Leuvenstein and Parikh (2002) and Hunt (2004, 2006).

⁵West–East migrants were excluded from the analysis because their number in GSOEP is small. People living or working in Berlin and commuters are excluded as well.

⁶The panel data analysis excluded the first years: The 1990 wave of GSOEP refers to the time before Economic, Monetary and Social Union, and the years 1991–1992 capture the period of massive downward adjustments of the labour force in East Germany and corresponding extensive active labour market programmes.

⁷Schooling includes general schooling, vocational and other training and university education. Years of schooling refer to the time necessary to achieve the corresponding qualification level.

⁸ Percentages refer to differences of logarithmic values.

⁹ See Hunt (2002) for a detailed discussion.

¹⁰Experience is derived from age and years of schooling.

¹¹Therefore, we do not work with hourly wages.

¹²Because the system of education in East Germany before unification was different, we do not work with education dummies.

¹³Because the estimation sample for each year is smaller, the year to year changes should be interpreted with care.