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Understanding Rising Income Inequality in Germany, 1999/2000–2005/2006

Authors


  • Note: The authors thank Bernd Fitzenberger, Richard Hauser, Daniel Hammermesh, three anonymous referees, seminar participants in Tübingen, Mainz, Rauischholzhausen, at the 8th International German Socio-Economic Panel User Conference, and at the Tagung des Vereins für Socialpolitik in Frankfurt, and the editor Conchita D'Ambrosio for many helpful comments and suggestions. All errors are our own. The data used in this paper (SOEP v26, 1994–2009) were made available by the German Socio-Economic Panel Study (SOEP) at the German Institute for Economic Research (DIW), Berlin.

Martin Biewen, Department of Economics, University of Tübingen, Mohlstr. 36, 72074 Tübingen, Germany (martin.biewen@uni-tuebingen.de).

Abstract

We examine the factors behind rising income inequality in Europe's most populous economy. From 1999/2000 to 2005/2006, Germany experienced an unprecedented rise in net equivalized income inequality and poverty. At the same time, unemployment rose to record levels, part-time and marginal part-time work grew, and there was evidence for a widening distribution of labor incomes. Other factors that possibly contributed to the rise in income inequality were changes in the tax and transfer system, changes in the household structure (in particular the rising share of single parent households), and changes in other socio-economic characteristics (e.g., age or education). We address the question of which factors were the main drivers of the observed inequality increase. Our results suggest that the largest part of the increase was due to increasing inequality in labor incomes, but that changes in employment outcomes and changes in the tax system also contributed considerable shares. By contrast, changes in household structures and household characteristics, as well as changes in the transfer system only seem to have played a minor role.

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