We analyze the economic factors which have contributed to the dramatic decline of the employment share of unskilled labor in German manufacturing, in particular the role played by the relatively rigid earnings structure. Potential effects of intensified international competition and skill-biased technological change on the relative employment and earnings position of unskilled workers are also discussed. We find that the substitution elasticity between unskilled and skilled labor is rather low. The decline in the employment share of unskilled workers attributable to an inflexible earnings structure therefore seems to have been modest compared to the trend decline in the skills ratio. We also find some modest effects from international competition and technological change on the employment share of unskilled labor. JEL classification: J23, J31 AcknowledgementWe thank Bertrand Koebel for providing us with national accounts data and his estimates of total productivity growth and user costs of capital. Bernd Fitzenberger and Lawrence Mishel provided helpful comments on an earlier version of this paper presented at the conference "Globalization, Technological Change, and the Welfare State", American Institute for Contemporary German Studies, The Johns Hopkins University, June 9 -10, 1997, Washington, D.C. Of course, all remaining errors are our sole responsibility. 3 Non-technical SummaryThe U.S. labor market and its employment performance over the last twenty years or so is often cited as a model for some of the European countries, and Germany in particular. While the U.S. economy has been more successful in creating jobs for the unskilled than the German economy, this seems to have come at the cost of a dramatic increase in earnings inequality in the U.S. which has hardly changed in Germany. These differential labor market developments in the U.S. and Germany seem to support the hypothesis of a trade-off between more jobs for unskilled workers on the one hand, and a less equal earnings distribution on the other. However, the few empirical studies which try to test this hypothesis for various countries have failed to provide conclusive results. For Germany, there has so far been very little research on the empirical importance of this alleged trade-off.In this paper, we analyze the economic factors which have contributed to the dramatic decline of the employment share of unskilled labor in German manufacturing, in particular the role played by the adjustment of relative earnings to increased international competition and technological change. Although the reduction in the relative supply of unskilled labor has certainly contributed to this development, it is only part of the story. The decline in the demand for unskilled relative to skilled labor (skills ratio) has also played an important role. On the basis of a simple econometric model, we find a trend decline in the skills ratio in the whole manufacturing sector of 3% per year. The estimated substitution elasticity from our preferred specification of the ...
The development of the West German earnings distribution in the 1980's is analysed on the basis of both the German Socio-Economic Panel and micro-data from the Employment Register of the Federal Labour Office. We find that earnings inequality in Germany has increased very little in the 1980's, if at all. It is shown •that the marked increase in earnings inequality found in previous studies based on the register data is a statistical artifact related to a change in the coding of the earnings data. Our decomposition analysis based on estimated earnings functions reveals that the relative stability of the German earnings distribution in the 1980's has not resulted from large compensating changes in the composition of the labour forc~on the one hand, and changes in the returns to human capital on the other. While both of these components have changed little in the observation period, the former rather than the latter component has contributed to the small increase in earnings inequality observed in the register data. If anything, the earnings differential between skilled and unskilled workers has become smaller during the 1980's, while within-inequality has contributed very little to changes in inequality. Overall, the empirical results of this study seem compatible with an institutional explanation of the stability of the German earnings distribution. JEL classification: J31, J24 AcknowledgementWe thank Stefan Bender from the Institute for Employment Research (lAB), Niirnberg, and our colleagues Patrick A. Puhani and Florian Kraus for helpful suggestions and discussions. Matthias Almus provided excellent research assistance. We are grateful to the Centre for Survey and Methodological Research (ZUMA), Mannheim, for providing us with some calculations from the Labour Force Surveys ("Mikrozensus") held there. Partial funding from the Anglo-German Foundation under the project "Labour Markets in Transitions" is gratefully acknowledged. The usual caveats apply.
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