The analysis of changes in the U.S. income distribution in Chapter 4 showed that inequality of both the functional distribution of labor incomes and the personal distribution of income increased during the eighties. A further important finding was that inequality within groups, again distinguished by qualification, grew. This happened in the context of specific institutional arrangements and under changing technological and market conditions, especially with respect to international market integration. Moreover, in the period under consideration U.S. politics was led by a more or less broad consensus on the political aim of a deeper market integration both in form of regional arrangements asNafta and participation in multilateral international arrangements such asGatt, and subsequent, theWto. The resulting academic debate started from causality considerations and has been considering the question whether economic internationalisation or technological progress, or both affecting each other, caused the inequality increase. To speak in terms of the flip-side hypothesis or two-side-of-the-same-coin hypothesis, these are the U.S. side issues.
The other side of the coin suggested here is the Western European scenario. So far, the flip-side hypothesis offers a structuring framework for a comparison of the U.S. and Germany, since the German case, which will be the subject of the fol-lowing chapters, fits several important characteristics of the European scenario.
Therefore, the focus on the German case requires reassessing the unemployment problem. The working hypothesis to which many studies of the U.S. case refer is the full employment assumption for labour markets, at least in the longer run. This was the argumentative basis for the application of zero profit conditions to derive estimation approaches for causality analysis. Actually, according to Oecd mea-surements reviewed in Figure3.1, U.S. unemployment moved around an average in the past decades, although there was a trend towards increased unemployment from the end of the sixties reaching its peak in the mid-eighties. Clearly, a long-term characteristic.
This finding stands in sharp contrast to what happened in Germany. There, total involuntary unemployment increased with a secular trend, starting from the begin-ning of the seventies, cf. Figure3.1. Neither economic development in the nineties
151
10 PERSISTING UNEMPLOYMENT AND THE DISTRIBUTION OF INCOME 152 nor the dramatic structural changes in Eastern Germany’s labour markets follow-ing German unification altered this persistent trend. To return to the stylised facts outlined in Section3.3, there were also interesting differences in unemployment du-ration. Figure3.1shed light on the details of differences in unemployment duration in both countries for the period from the mid-eighties to the end of the nineties.
Compared to the U.S., in Germany the average share of long-term unemployment in total involuntary unemployment was about three times that of the average U.S.
share. Naturally, short-term involuntary unemployment generates distributional ef-fects different from those caused by long-term involuntary unemployment. If work-ers suffer repeatedly from involuntary unemployment, accelerating depreciation of their human capital may lead to lower reservation wages in the case of reemploy-ment. Or, repeated long-term involuntary unemployment may lead to long-term dependency on transfer payments accompanied by extensive negative saving affect-ing non-labour components of personal income. Such analysis requires panel data.
In a word, for the German case the full employment assumption does not fit. The flip-side hypothesis thus postulates different price and quantity effects under the two different scenarios. While in the U.S. case factor prices are expected to clear labour markets in the longer run and thus induce market equilibrium, in Germany quantity adjustment ensured a rationing equilibrium.
Comparing the main changes in the German and the U.S. income distribution means that distributional effects implied by involuntary unemployment have to be carefully considered especially with respect to the German case, as suggested by the flip-side hypothesis. Interpreting the flip-side hypothesis in an oversimplified manner, the German case should be examined as to whether involuntary unemployment has borne the brunt of distributional effects caused by economic internationalisation or technological progress, or their interaction. Naturally, involuntary unemployment generates distributional effects, for the German case cf. for example Hauser and Wagner (1997). Yet, when unemployment is neglected, the bias of wage inequality analysis rises in the case of an increase in unemployment with absolute employ-ment unchanged, since the considered number of income recipients would decrease.
Therefore income inequality analysis requires the investigation of changes in both unemployment and employment.
The probability of becoming unemployed is correlated with an individual’s labour characteristics. The flip-side hypothesis and the trade and wages debate focus on skill. In this connection, two remarks with respect to the endogenous skill structure of labour supply: first, there are unemployment determinants that can be influenced by individual labour supply decisions as to time, space and skill. Second, there are conditions like ability constraints or structural changes that have to be treated either exogenously or parametrically when labour supply decisions are made. From the perspective of the trade and wages puzzle, the latter might be induced by either technological progress or economic internationalization.
Once again, it should be emphasised that the trade and wages debate took income distribution descriptions that found significant structural changes in the U.S. as a starting point. Furthermore, it is worth stressing that by reconstructing the empirical debate and identifying the roots of the appropriate theoretical approaches,
10 PERSISTING UNEMPLOYMENT AND THE DISTRIBUTION OF INCOME 153 which were developed at the same time as the empirical trade and wages puzzle without a problem-orientated link, the way to the recently more integrated research can be better understood. Three main questions serve as a guideline:
1. Did the qualificatory structure of involuntary unemployment really change in the direction implied by the flip-side hypothesis? Or, differently put: were unskilled and low-skilled workers really much more concerned by involuntary unemployment compared to those with higher qualifications?
2. How did the functional distribution of labour incomes change in the eighties, a decade in which functional labour income disparity in the U.S. increased to a significant extent ?
3. What distributional implications resulted from structural changes in involun-tary unemployment?
The following section will address whether, to which extent, and in favour of which factors and households, the functional and personal distribution of income changed in Germany during the last decades.
10.1 Distribution, Employment, Skills and the Flip-Side Hypothesis
As to the distribution and composition of individual incomes, Chapter 2 outlined the complex effects due to involuntary unemployment. Firstly, involuntary unem-ployment means loss of functional labour income. Normally, the highly developed German social security system partly compensates these losses by transfers paid on basis of claims to the social security system. Subsequently, if unemployment per-sists the unemployed receive transfers first in form ofArbeitslosenhilfe and lateron in form of subsidiarySozialhilfe. Even if social security benefits or transfer incomes received by the unemployed partly compensate missing labour income, continuing unemployment leads to significant changes in the structure and level of household in-comes. If there is persisting labour market rationing of certain qualification groups, effects on the workers’ personal incomes themselves affecting the overall distribu-tion of personal income can thus be expected. Albeit simplifying and superficial, this line of reasoning again emphasises that the duration structure of involuntary unemployment is of importance when the nature of its distributional effects is to be understood more comprehensively.
Households react to rationing on the labour market by both short-term and long-term endogenous labour supply decisions. In principal, due to transaction costs and time-consuming learning processes in the shorter run, endogenous labour supply decisions are mainly expected in the form of quantity reactions. By contrast, in the longer run there are additional endogenous supply reactions as to labour quality.
It was the latter effect that underlay the functional income distribution analysis by Findlay and Kierzkowski (1983). Relative goods price changes due to international trade imply changes in relative factor prices and thus create incentives to demand either more or less education. Therefore, the skill composition of the long-term labour stock would change. However, the German case does not fit the assumed
10 PERSISTING UNEMPLOYMENT AND THE DISTRIBUTION OF INCOME 154 perfect competitive scenario on goods and labour markets assumed by Findlay and Kierzkowski (1983). The debate will come back to this issue below.
Besides the persistence phenomenon, what are the stylized facts characterising in-voluntary unemployment in Germany in the two decades where wage disparity was increasing in the U.S.? For Germany, Figure 10.1 gives an overview of qualifi-cation specific unemployment rates and the overall unemployment rate from the mid-seventies to the end of the nineties. Overall unemployment rates in Figure10.1 may differ from those in Figure3.1 because in the latter, unemployment rates cal-culated by theOecdwere used for reasons of comparability. By contrast, Reinberg (1999) calculates the unemployment rates shown in Figure10.1on the basis of the Bfa definition, where unskilled labour is defined as without certificate, medium-skilled labour asLehre/Berufsfachschule, and high-skilled labour asFachhochschule
Figure 10.1
Unemployment Rates for Germany Classified by Educational Levels
76 78 80 82 84 86 88 90 92 94 96 98
0 5 10 15 20 25 30
......................................................
. . . .... . .. ................ . . . .. .. . . . .. .. . . ........ . .............. .. . .. . ........... . . .
... ... ... ... ... ... ... ... ... ....... ........... .... ... ... ... ... ... ... ... ... ... ... ...... ......... ...... .... ..... ... ... ... ...... ..... ........ ..... ... . ... ... ... ... ... ..... .... ... ... ... ... ... ... ...... ... ....... ... ...... ...
..................
..................
No certificate
. . . .
Lehre/Berufsfachschule
... ... ... ...
Fachschule
... ...
Fachhochschule
...
University
...
Total
...
Source: Reinberg, 1999, p. 444.
or university. Surely, such classification ignores other important characteristics like vocational experience in forming qualification categories and to analyse the extent to which they are affected by involuntary unemployment. Furthermore, this proce-dure puts aside additional principal problems that arise from skill classification by educational levels like those discussed in Section2.4.
What is most striking is the discrepancy between the average unemployment rates skilled and unskilled workers have been suffering on the one hand and the average unemployment rates of high-skilled workers on the other. While markets for highly skilled labour seem to have been characterised by almost full employment, at least in the longer run, unskilled labour suffers from unemployment rates of around 25
10 PERSISTING UNEMPLOYMENT AND THE DISTRIBUTION OF INCOME 155 per cent. If one believes Reinberg (2000), this severe labour market segmentation with respect to the degree of rationing of different labour skills, ceteris paribus, must be expected to increase in the future.
The differences in the level of unemployment rates are not the only point: the sig-nificant structural difference of their changes is also notable. While unemployment rates of high-skilled labour, i.e. those workers who have acquired at least a
Fach-Figure 10.2
Proportional Share of Different Educational Levels in Total German Employment
1975 1980 1985 1990 1995
.
Ungelernte .... Facharbeiter
..
Source: M¨oller, 1999, p. 12.
hochschule degree, have been moving around averages, unemployment rates of all other qualifications were clearly persisting, even though level shifts observable for Lehre/Berufsfachschule and Fachschule were not nearly so dramatic compared to the level shifts of unemployment rates of unskilled workers.
At the same time, the persistent rise in unskilled labour unemployment rates accom-panied the dramatic decrease of this qualification’s share in total employment, as shown in Figure10.2. For the U.S., Figure4.1 indicated similar structural changes with respect to the skill composition of total employment. There, skill upgrading in recent decades has become obvious. Certainly, Figure10.2 is only superficial in its description. Undoubtedly, educational levels in the U.S. and Germany cannot be readily compared because of numerous semantic and formal differences. What can be learned from Figure 10.2is a clear secular trend towards increased employment shares of higher skills, that can also be observed for the changes in the qualificatory structure of U.S. employment. In particular, the share of unskilled workers de-creased dramatically, and this trend is far from having ended, cf. Tessaring (1994).
These structural changes are also reflected in the income shares earned by different
10 PERSISTING UNEMPLOYMENT AND THE DISTRIBUTION OF INCOME 156 socio-economic groups. Becker and Hauser (1995) emphasise that from the early seventies to the beginning of the nineties, workers’ share of total income decreased from about 38 per cent to about 26 per cent. This development is part of a struc-tural change characterised by the increasing share of Angestellten jobs and by the increasing female labour supply, to name only some characteristics of the changes in employment composition.
The structural changes in the qualificatory composition of both employment and involuntary unemployment occurred against the background of an almost ten per cent increase in total employment in the period from 1975 to 1990, as shown by Fitzenberger (1999a, 1999b). In his methodologically sophisticated studies he found a decrease in employment of low-skilled workers of almost 50 per cent. Moreover, he found that employment of skilled workers almost doubled, so one can indeed speak of a strong skill upgrading in overall employment. Turning from employ-ment to involuntary unemployemploy-ment, the structure of qualification-specific involun-tary unemployment shown by Reinberg (1999), cf. Figure 10.1, was confirmed by Fitzenberger (1999b), who distinguished low-skilled labour, medium-skilled labour and high-skilled labour.
Employment also shifted sectorally in the form of a decreasing share of Fachar-beiter in services since the mid-eighties and an increasing share of Facharbeiter in manufacturing, as found by M¨oller (1999). Yet what Figure 10.2 shows is that the overall share of medium-skilled workers, i.e. Facharbeiter, forming the bulk of total employment, has remained almost constant. Iabsemployment data are suitable for this, because they can be disaggregated by sectors, and thus sectoral employment shifts can be analysed. In particular, the increasing share of high-skilled workers, that is those who either finished Fachhochschule or university, confirms the trend towards considerable skill upgrading since the seventies. Hence, unskilled labour’s share in unemployment was increasing as its share in total employment was falling to a large extent. The sectoral structure of employment has changed as well: the share of manufacturing in total employment decreased. This development is unam-biguously similar to the U.S. situation, as highlighted by Abraham and Houseman (1995) and others. Again, this seems to underline what the flip-side hypothesis suggests: despite complex changes in both the qualificatory and the sectoral em-ployment structure, relative income positions of unskilled and low-skilled workers relative to skilled workers have been stable.
To complete the stylised facts necessary for a strict formulation of the flip-side hypothesis requires the functional distribution of labour income to be analysed, since the German part of the flip-side hypothesis critically depends on a stable degree of inequality of the functional distribution of labour incomes. From the point of view of distributional analysis, it should be emphasised that a stable functional distribution of income focuses solely on the labour incomes of those who remain employed. Unemployment’s distributional effects on the functional distribution of labour incomes are neglected. The hypothesis of a rather stable degree of income inequality, ensured by market results compensating welfare state mechanisms, may have encouraged this neglect. Even if measures of income inequality has shown such stability they must be examined to determine whether any forces were at work
10 PERSISTING UNEMPLOYMENT AND THE DISTRIBUTION OF INCOME 157 cancelling each other out. The comparative poverty study by Hanratty and Blank (1992) illustrates this well and serves as an example for a distribution study that finds considerable differences in the extent to which the distributional effects by similar forces have been compensated or not once in Canada and once in the U.S.
In the following section, the stylised facts characterising the German income distri-bution shall be examined on the basis of distridistri-bution studies that focus on either both the functional and the personal distribution of income or on only one of the two distributions. In this connection particular attention will be paid to the eighties.
Only by such a procedure that builds on sophisticated methods to describe several dimensions of income inequality can the question of whether the predominant view of the German distribution of income as globally more equal than the U.S. is correct in any sense be answered. In addition, this procedure is a necessary step because only deeper insights into the characteristics of the income distribution’s anatomy allow a clear identification of the central theoretical issues: are the forces that de-termine the changes in the U.S. income distribution also at work in Germany? Up to now this analysis has remained incomplete.
10.2 Exploring the Functional Distribution of Labour Income Table10.1 gives an overview of income distribution studies that explore changes in the degree of functional labour income inequality, where labour is distinguished by skill, in Germany. Naturally, there exist far more studies than listed here. However, the most interesting point of the chosen studies is the different data sources on which they are based. Both cross-section data such as data from theEvsand theBfa, and longitudinal data from theGsoepare analysed. Whereas theGsoeptakes both em-ployment liable to social security and self-emem-ployment into consideration and builds on a more comprehensive income concept including additional payments, the social security data of theBfaare restricted to data from dependently employed workers below the social security income threshold with only regular payments recorded.
Incomes higher than the social security threshold are counted as if workers would have just earned the threshold income. As to the data limitations and characteris-tics outlined in Section2.4 the deficits of each data set can be carefully evaluated when empirical findings on changes in the degree of functional income dispersion are to be compared. In order to measure income inequality, these studies also use the measurement concepts thoroughly discussed in Section2.2. A deeper understanding of these measures thus serves once more as an important input to the evaluation of results derived by empirical income distribution analysis.
In his more recent study, Grund (1998) analysed the functional distribution of labour incomes on the basis of Gsoep income data. The author calculated dif-ferent percentile distances, Gini coefficients, the Atkinson measure for difdif-ferent sensitivity coefficients, and the IT-measure from the generalized class of entropy measures. Moreover, he did not only analyse overall income inequality but also in-equality of labour income distinguished by skill, measured as the highest completed educational degree: skill categories are ungelernt, Berufsausbildung and (Fach-)
10 PERSISTING UNEMPLOYMENT AND THE DISTRIBUTION OF INCOME 158
Table10.1 TheFunctionalDistributionofLabourIncomeinGermany StudyDataProcedureFindings AbrahamandHouse- man(1995)Periodcovered1976to1989;social securitymicrodatafromtheBfa ongrossearningsoffull-timemale workersdistinguishedbyeduction; dataonaveragegrossmonthlyearn- ingsfromtheGsoep;meanweekly earningsdataforfull-timeblue-collar workersandmeanmonthlyearnings dataforfull-timewhite-collarwork- ers;earningsaredistinguishedby broadlydefinedskillcategoriesofthe SurveyofCompensationinIndustry andTrade Relativeincomeshares;percentileratios; earningsratiosofmedianincomesdistin- guishedbyskill
Exceptforthe90th/10thandthe50th/10th percentilerationwhichfellintheperiodbe- tween1983to1989,allotherpercentileratios remainedlargelyconstant,i.e.,atthebottom therewasaslightnarrowingoftheincome distribution;nowideningofearningsdiffer- entialsacrosseducationgroups;noincrease inwithin-groupearningsinequality Becker(1996)Evsdatafrom1962/63to1988; first,allpersonswithnon-zerowage andsalaryincomeareincluded;sec- ond,concentrationonthosewhohave beenemployedthemainpartof thesurveyyearandearnedabove thelowersocialsecuritythresh- old;amongstotherthingsblue-collar workers,white-collarworkersand civilservantsaredistinguishedas qualificationgroups
Ginicoefficient;Atkinsonmeasureswithlow andhighinequalityaversion;Theilmeasure; quintileshares
Sharpincreaseincivilservants’within-group incomeinequality;comparedtoincomein- equalitywithinthegroupofblue-collarwork- ersandcivilservants,incomeinequality withinthegroupofwhite-collarworkers washighest,wherewithin-groupinequality sharplyincreased;overallincomeinequality remainedquitestable;slightincreaseinal- mostallindicatorssincethebeginningofthe eighties;thehighinequalityaversionAtkin- sonmeasurehadincreaseduntiltheendof theseventiesandfellafterwards;whilethe 90th/50thpercentileratioremainedalmost stable,the50th/10thandthe90th/10thper- centileratiosincreasedtoagreaterextent;the Theilmeasureincreasedfromtheendofthe sixtiestothebeginningoftheeightiesand thenremainedmoreorlessstable