Polarization and Rising Wage Inequality - Comparing the U.S. and Germany

Dirk Antonczyk 1, Thomas DeLeire2, Bernd Fitzenberger1
1University of Freiburg, Germany, 2University of Wisconsin - Madison, USA

In this paper, we estimate trends in wage inequality in the U.S. and in Germany. Building on the approach suggested by MaCurdy and Mroz (1995), we separately identify lifecycle wage profiles, macroeconomic shifts, and cohort wage effects. We find that between 1979 and 2004, there was widening wage dispersion in both the U.S. and Germany. However, there are many distinct patterns of this widening across the two countries. For example, in the U.S., since the 1990s, we see faster wage growth at the top (80th percentile) and bottom (20th percentile) than at the median of the wage distribution, which might be interpreted as evidence of polarization, but we see hardly any evidence of wage polarization in Germany after the mid-1980s. Moreover, we see a large role played by cohort effects in Germany - suggesting a role for supply-side effects - while we observe only small cohort effects in the U.S.. Because of these differences in the patterns of wage dispersion across the U.S. and Germany, an explanation that should be common across the two countries, such as skill-biased technological change (SBTC), cannot alone support the empirical findings. A more promising approach in order to explain changes in wage-inequality over time might thus be to consider to a larger extent the interaction between labor market institutions, supply-side effects, and SBTC.

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