Abstract
This paper compares trends in wage inequality in the U.S. and Germany using an approach developed by MaCurdy and Mroz (1995) to separate age, time, and cohort effects. Between 1979 and 2004, wage inequality increased strongly in both the U.S. and Germany but there were various country specific aspects of this increase. For the U.S., we find faster wage growth since the 1990s at the top (80% quantile) and the bottom (20% quantile) compared to the median of the wage distribution, which is evidence for polarization in the U.S. labor market. In contrast, we find little evidence for wage polarization in Germany. Moreover, we see a large role played by cohort effects in Germany, while we find only small cohort effects in the U.S.. Employment trends in both countries are consistent with polarization since the 1990s. We conclude that although there is evidence in both the U.S. and Germany which is consistent with a technology-driven polarization of the labor market, the patterns of trends in wage inequality differ strongly enough that technology effects alone cannot explain the empirical findings.
Highlights
A substantial body of research has documented increasing wage inequality in industrialized countries
Mroz (1995) to separate age, time, and cohort effects, we find a large role played by cohort effects in Germany, while we find only small cohort effects in the U.S Employment trends in both countries are consistent with polarization since the 1990s
There is topcoding in labor earnings in the Current Population Survey (CPS) but the share of topcoded observations is very small compared to the data used for Germany (Burkhauser and Larrimore 2009) so this is unlikely to affect the 80%-quantile regressions which we undertake in our subsequent analysis
Summary
A substantial body of research has documented increasing wage inequality in industrialized countries (see the surveys by Acemoglu and Autor 2011; Katz and Autor 1999). Even though SBTC may have a bias in the age/cohort dimension, most of the recent literature on trends in wage inequality (see, e.g., Autor et al 2008; Dustmann et al 2009) restricts itself to a comparison of cross-sectional age or experience profiles in different years. We implement a test of the separability of the three effects using standard errors robust against correlation across time and cohort, and we discuss identification of the linear effects Based on this approach, we examine trends in wage inequality within and across cohorts of full-time working men in the U.S and Germany by describing a set of quantiles. We examine trends in wage inequality within and across cohorts of full-time working men in the U.S and Germany by describing a set of quantiles Wage dispersion in both countries has been rising since the end of the 1970s. There is topcoding in labor earnings in the CPS but the share of topcoded observations is very small compared to the data used for Germany (Burkhauser and Larrimore 2009) so this is unlikely to affect the 80%-quantile regressions which we undertake in our subsequent analysis
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