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Inequality-adjusted wage differentials in East and West Germany

Researchers: Ekaterina SELEZNEVA and Philippe VAN KERM (CEPS/INSTEAD, Luxembourg)

This paper provides 'inequality-sensitive' assessment of gender wage differentials in Germany. The objective is to look beyond differences in the average wage of the average men and women, and to take into account inequality and higher order differences in the wage distributions using standard expected utility concepts. This is particularly relevant if workers have some degree of risk or inequality aversion with respect to the distribution of wages.
A growing literature has developed recently to go beyond expected wage comparisons, and focus on detailed quantile differences. The approach followed in this paper diverges from these approaches in that it adopts an explicit expected utility framework to derive measures of wage differentials incorporating explicit judgments about dimensions of risk and inequality. This is useful, for example, to examine if women are penalized twice, with both lower average wages and greater risk or inequality, or if, on the contrary, lower wages tend to be compensated by more favourable configurations of higher moments - a situation that could be hypothesized as a partial explanation for the persistence of differences in mean wages.
The particular appeal of the SOEP for this application is that it contains direct individual-level measures of risk attitudes which permits direct estimation of individual coefficients of relative risk aversion that can be plugged in the measures described above (which otherwise have to rely on assumptions about women's risk aversion or rely on assumed 'social planner' preferences).
Modeling (conditional) wage distributions using a flexible parametric model, we find that the gender wage gap is significantly larger when inequality is taken into account. The impact of taking inequality into account is particularly large in East Germany. As a consequence, the East/West difference in the gender wage gap narrows down substantially. These results also hold when endogenous labour market participation is taken into account.