Known for strong labor regulations and a robust social services net, it turns out Germany, Europe’s largest economy also suffers from rising wage inequality, driven by a decline in collective bargaining, and less obviously an increase in global trade.
What role has the growth in global trade played in rising wage inequality in Germany?
The new STUDY-Increasing-Wage-Inequality in Germany by GED Project and the ifo Institute in Munich demonstrates that the decline in collective bargaining is the number one factor in rising wage inequality in Germany. But international trade, has played a, not insignificant, role as well.
Although wage inequality in Germany remains lower than the OECD average, it has risen faster in the last two decades than in the USA and Great Britain.
The real wages of Germany’s high earners in the top 20-percent bracket have increased by 2.5 percent (adjusted for inflation) since the mid-1990s. At the same time, wage levels sank by 2 percent in the lowest 20 percent. During that same period of time, the percentage of companies with collective wage agreements declined from 60 to 35 percent. Likewise, the share of employees covered by a collective wage agreement dropped from 82 to 62 percent. This decline is the strongest driver for rising wage inequality. The study estimates that the share of collective bargaining agreements has shrunk to around 43 percent.
Conventional theories on the correlation between inequality and trade, such as the Stolper-Samuelson theorem, have lost their empirical foundation.
Traditional trade theories focus on the return on education. According to such theories, the return on education rises in highly developed countries such as Germany due to the distribution of labor with less affluent countries, while the value of low educational qualifications or a lack thereof declines. However, studies show that only about 20 percent of the structure of wage inequality can be explained by this factor. The remaining 80 percent has more to do with the characteristics of the employer.
Evidence has shown that companies engaging in international trade pay higher wages, so small and midsized businesses – which traditionally have a more difficult time marketing their products on a global level – should receive support specifically to enhance their competitive and export capabilities.
Wage inequality table (Germany)
It is plausible that the decline of collective forms of wage bargaining were set into motion with the process of growing international interdependence.
While we were only able to identify a very limited influence for companies’ international engagement on the growth of wage inequality, the influence did increase during the more recent time segment. Yet even if the determined direct effect of international trade on the inequality trend turns out to be moderate, it is conceivable that increased international integration through interdependencies with the changed institutional environment has an indirect relevance for the development of inequality.
It is thoroughly plausible that the decline of collective forms of wage bargaining as well as the widespread usage of escape clauses and other measures to increase wage flexibility at the company level were set into motion with the process of growing international interdependence.
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About the study “Increasing Wage Inequality in Germany: What Role Does Global Trade Play?”
In its Global Economic Dynamics project, the Bertelsmann Stiftung focuses on the issue of shaping inclusive and sustainable growth in the face of ongoing globalization. One fundamental assumption is that the increase in economic integration has positive effects on economic growth for all participating national economies. Two previous studies (“ Globalization Report 2014” and “20 Years of the European Domestic Market”) showed that this assumption is true for most national economies at the macro level. This study examines the actual influence of global trade on rising wage inequality in Germany between 1985 and 2010. Data from the German Federal Employment Agency, particularly from the SIAB (Stichprobe der Integrierten Arbeitsmarktbiografien) and the LIAB (Linked Employer-Employee Data), served as the primary information source. The influence of possible causes on the growing gross wage inequality were calculated using variance decompositions and RIF (recentered influence functions) regressions. These methods were able to break down the rise in wage inequality into a total composition effect and a total wage structure effect, enabling the experts conducting the study to determine the individual contribution of each explanatory factor for both components.