Germany
UniversityPressScholarshipOnline
OxfordScholarshipOnline
ChangingInequalitiesandSocietalImpactsinRich
Countries:ThirtyCountries'Experiences
BrianNolan,WiemerSalverda,DanieleChecchi,IveMarx,AbigailMcKnight,IstvánGyörgy
Tóth,andHermanG.vandeWerfhorst
Printpublicationdate:2014
PrintISBN-13:9780199687428
PublishedtoOxfordScholarshipOnline:April2014
DOI:10.1093/acprof:oso/9780199687428.001.0001
Germany
RisingInequalityandtheTransformationofRhineCapitalism
GiacomoCorneo
SonjaZmerli
ReinhardPollak
DOI:10.1093/acprof:oso/9780199687428.003.0012
AbstractandKeywords
Germanyhasdisplayedaremarkablystabledistributionofhouseholdnetincomesexcept
fortheperiod2000–2006wheninequalityrapidlyincreased,bothatthebottomandthe
topofthedistribution.Theriseofincomedisparitiescanbeattributedtorising
unemploymentrates,growinginequalityinmarketreturnsreturns,andchangingtax
legislations.Inashort-termperspective,theriseofincomeinequalitywasassociatedwith
increasingmaterialdeprivation,lowerhappiness,andlessmobilityoutofpoverty.Inthe
longrun,however,trendsinthesesocialindicatorsdonotparallelthedevelopmentof
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Germany
incomeinequalityoverthepasttwodecades.Politicalbehaviouralandattitudinalpatterns
duringthepasttenyears,whichsawlowerturnoutrates,lesstrustinotherpeopleand
politicalinstitutionsaswellasstrongeropposingviewstowardsimmigrants,particularly
amongsttheleasteducated,aremoreinlinewithinequalitytrends.
Keywords:incomeinequality,unemployment,taxlegislation,deprivation,happiness,voterturnout,
Germany,socialimpacts,immigrants,poverty
1.Introduction1
INthe1980s,Germanyconsistedoftwoseparatestateswithdifferenteconomic
systems:theFederalRepublicofGermany(FRG),amemberofNATOwithapopulation
ofalmost62million;andtheGermanDemocraticRepublic(GDR),amemberofthe
WarsawPactwithapopulationofabout17million.Inthefollowing,weonlydealwiththe
FRGduringthe1980sandwithboththeEast(theformerGDRandWestBerlin)andthe
West(therest)afterreunification—whichoccurredon3October1990.
TheeconomicsystemoftheFRGduringthe1980scanbedescribedasacorporatist
variantofcapitalism,referredtoasRhinecapitalism.Ithastwodistinctivetraits.Thefirst
iscooperativeindustrialrelations,bothatthefirmlevel—withworkcouncilsandcodeterminationinlargefirms—andatthenationallevel—withcomprehensiveindustry-wide
wageagreementsstruckbetweenemployerrepresentativesandtradeunions.The
secondisahighlydevelopedsocialsecuritysystemoftheBismarckianvariety,strongly
relyingontheequivalenceprinciple,andstronglydeterminedbytheworkhistoryand
familycircumstancesoftheinsured.Inconditionsclosetofullemployment,asthey
prevailed(p.272) inGermanyduringthethreedecadesafterWorldWarII,Rhine
capitalismwassuccessfulinprovidinginsuranceagainstincomeshocksandrestraining
long-termincomedisparities.
Sincereunification,theGermaneconomicsystemhasundergonefar-reachingchanges,
involvingthehybridizationofthecorporatistmodelinheritedfrompre-reunificationFRG
withelementsthatareborrowedfromtheAnglo-Saxonworldofcapitalism:deunionization;privatizations;minimumwagesinsomesectors;akindofearnedincometax
credit;decliningpublicpensions;subsidizationofprivateretirementsavings;anda
strongeremphasisonshareholdervalue.Aswewillshowinthischapter,this
transformationhascomewithasubstantialincreaseinincomeinequalitythatcametothe
foreduringthefirsthalfofthelastdecade.Atthesametime,politicaldisenchantment,
socialintoleranceanddemandsforredistributivepolicieshavebecomemorecommon.
TheFRGofthe1980swasoneofthemostaffluentandegalitariancountriesintheworld.
AverageincomewashigherinWestGermanythaninFranceorintheNetherlandsand
onlytheScandinaviancountriesexhibitedamoreevenincomedistribution.The
integrationin1990oftheGDRintothepoliticalstructureofthemoreaffluentFRGimplied
thatreunifiedGermanywasstartingwithalowerlevelofper-capitaGDPthanWest
Germanyhadin1990.Still,atthebeginningofthe1990s,reunifiedGermanyhadahigher
levelofpercapitaGDPincurrentpricesthanFranceandtheNetherlands.Reunification
alsoproducedanimmediateeffectonincomeinequality:ontheonehand,thepopulation
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Germany
ofWestGermanywasmergedwithapoorerpopulation,whichtendedtoincrease
inequality;ontheotherhand,thatpoorerpopulationhadmoreevenlydistributed
incomes,whichtendedtoreduceinequality.Asaresult,justafterreunification,Germany
stillexhibitedanincomedistributionthatwasquiteegalitarianbyinternational
comparison.
Afterreunification,themacro-economicperformanceofGermanyhasbeenonthewhole
ratherpooruntilabout2006.GermanGDPgrowthhasbeenlow,notonlyascompared
withformerdecadesbutalsobyinternationalstandards.IntermsofGDPpercapitain
currentprices,reunifiedGermanyhasbeensurpassedbyAustria,Belgium,andthe
Netherlands,andithasbeencaughtbyFrance.Thedisposableincomeofprivate
households,exceptforsomegrowthyearsinthesecondhalfofthe1990s,hasstagnated
mostofthetime.Inrealterms,medianhouseholdequivalentnetincomein2008wasonly
5percenthigherthanin1991.2
Ahighunemploymentrateaccompaniedsloweconomicgrowthinthefifteenyearsthat
followedreunification.Theunemploymentrate,measuredaccordingtotheofficialGerman
definition,increasedfrom7.3percentin1991to13percentin2005.3Sincethen,
however,unemploymenthassubstantiallydeclinedandreachedagainthelevelithadat
thetimeofreunification.
Thenumberofworkingpeoplein2005wasaboutthesameasitwasin1991.After2005,
employmentgrewrapidly.In2010,therewereabout1.6millionworkingpeoplemore
comparedto2005,4employmentinGermanyhasthusincreasedbyabout4percent
from1991to2010.However,sinceaverageworkhoursperemployedpersonhave
substantiallydecreased,(p.273) totalworkinghourshaveactuallydeclinedby4per
centfrom1991to2010.Theevolutionofemploymentwasverydifferentforthe
employeesandtheself-employed:whilethenumberofemployeesincreasedbyonly2
percent,thenumberofself-employedpersonsincreasedbymorethan25percent.
Moreover,thelabourmarketunderwentadualizationprocess,entailingtheriseofa
largesegmentofbadly-paidandunstablejobs,mostofthemintheservicesector.
Labour’sshareinGermannationalincomedeclinedbetween1991and2010from71per
centto66.3percent,thebulkofthedeclineoccurringintheperiod2000–2007.
Correspondingly,entrepreneurialandpropertyincomeincreased.Inrealterms,
employees’compensationincreasedverymodestlybetween1991and2010.Average
grosshourlywagesincreasedinrealtermsduringthe1990s,asemployeesinthe
regionsoftheformerGDRreducedthepaygapthatseparatedthemfromtheir
counterpartsintheWest.Since2000,averagerealhourlywageshavestagnatedin
Germany.
Thestructureofaggregatedemandhaschangedsignificantlysincethebeginningofthe
2000s:whileconsumptionandinvestment,bothprivateandpublic,havestagnated,the
currentaccounthasthrived.Since2004,atradesurplusoftheorderof5to6percent
ofGDPhasbeencommonforGermany.TheshareofGermanproductionthatissold
abroadalmostdoubledduringthelasttwodecades:exportsrepresentnowabout50
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Germany
percentofGDP,whiletheyrepresentedonlyabout26percentofGDPin1991.
TheshareofGDPobtainedfromserviceshasincreased,whilethesharesofagriculture
andmanufacturinghavedeclined.However,ascomparedtoothercountries,therelative
declineofmanufacturinghasbeenlesspronouncedinGermanyanditsshareofGDPis
highbyinternationalstandards.Manufacturingisdirectlyresponsibleforaboutone
quarterofalljobsinGermany,formostoftheexportsandforGermany’scurrent
accountsurplus.Germanmanufacturersoftenspecializeinhigh-technologyproductions,
investheavilyinR&Dandbenefitfromawiderangeofgovernmentprogrammesto
supportscientificresearchandinnovation.Largecompaniesactasmultinational
enterpriseswithsubstantialforeigndirectinvestment(FDI)acrosstheentireglobe.
MostvalueaddedinGermanmanufacturingcomes,however,fromsmallandmediumsizeenterprises.Theyareoftendeeplyrootedintheterritorywheretheyproduceand,
atthesametime,havesuccessfullyoutsourcedpartoftheirproductiontoproducersin
EasternEuropeandAsia.
Typically,industrialrelationsinmanufacturingfirmsarepeacefulandcharacterizedbya
cooperativeattitude.Inlargecompanies,co-determinationismandatedbylaw.The
strongperformanceofGermanmanufacturingreliesuponinstitutionsthatfavourtherise
anddurabilityofanetworkoflong-termrelationshipsbasedonmutualtrust.In
particular,thebankingsectorischaracterizedbythestrongpresenceoflocalpublicand
mutualsavingsbanksthatsupporttheexpansionstrategiesofsmallandmedium-size
enterprises.Furthermore,Germanmanufacturersbenefitfromadualsystemof
educationthatcombinesschoolingwithvocationaltraininginfirms.Thissystemhas
proventobeaneffectivewaytofosterhumancapitalinvestment,limityouth
unemploymentandprovidefirmswiththeskilledworkforcetheyneedinordertobe
internationallycompetitiveinpost-fordisthigh-techindustry.
GlobalizationhasaffectedGermanyalsointermsofthecompositionofitsresident
population.Overthelastfiftyyears,theshareofforeignerslivinginGermanyhas
stronglyincreased,startingfromaverylowlevel.Today,theTurksarethelargestgroup
ofresidentforeignpopulation,itslargesizegoingbacktothepolicyofactivelyrecruiting
(p.274) ‘guest-workers’inthe1960s.Manyimmigrantswerealsorecruitedfrom
SouthernEurope,inparticularItalyandYugoslavia.Contrarytoofficialexpectations,
most‘guest-workers’didnotreturntotheircountriesbutstayedtoliveinGermanyand
startedtheirownfamilies.Germanintegrationpolicybeganrelativelylateandhasnot
beenverysuccessfulyet.AfterthedemiseoftheSovietempire,therehasalsobeena
largeinflowofpeoplefromEasternEurope,inparticularethnicGermans.
Amainpolicyconcernduringthelasttwodecadeshasbeentheconvergenceofliving
standardsandproductivityintheregionsoftheformerGDRtothoseinWestGermany.
StartingfromlessthanhalfoftheWestGermanlevelin1991,realGDPperemployed
personintheEasthasincreasedtoabout80percentoftheWestGermanlevelin2009;
thestrongestincreasetookplaceinthefirsthalfofthe1990s.Theaveragegrossmonthly
wageoffull-timeemployeesintheEastwasjust46.5percentofthecorrespondingwage
intheWestin1991.Fiveyearslater,theEast-Westratiohadalreadyclimbedto73.2per
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cent.In2009,itamountedto76.5percent.Convergencewasonitswayalsowith
respecttoaveragehouseholddisposableincome:theEast-Westratioincreasedfrom
59.2percentin1991to78.3percentin2008.
Whereconvergencehasfailediswithrespecttoemployment.Overtime,the
unemploymentrateintheEasthasremainedatroughlytwicetheleveloftheWest.The
atrophyofEasternemploymentascomparedtoemploymentintheWestismatchedby
itsworsedemographicevolution.From1990to2008,thepopulationlivingintheEast
declinedby11.7percent,whilethepopulationoftheWestgrewby6.5percent.The
declineofthepopulationintheEastwentalongwithamassiveincreaseintheaverageage
ofitsresidentpopulation.5Thiswasduetoadramaticdecreaseoffertility,anincreaseof
longevity,andlargeoutflowsofyoungmigrants,especiallywomen.
2.IncomeInequality
Germanincomeinequalitywasratherstableduringthe1980s.Afterreunification,the
inequalityofmarketincomesandtheinequalityofearningsatthebottomofthe
distributionbegantoincrease.Theincreaseofinequalityatthelevelofprimaryincomes
acceleratedintheyears2000–2005andthatinequalitystayedroughlyconstant
afterwards.Bycontrast,thedistributionofdisposableincomedidnotbecome
significantlymoreunequalduringthe1990s.Inequalityofdisposableincome,poverty,
andincomeconcentrationatthetopofthedistributionrapidlygrewintheyearsfrom
2000to2005andhasstoodatthathigherlevelsince.
InequalityamongHouseholds
Householdincomeisakeydeterminantofthestandardofliving.Inordertotake
householdsizeandcompositionintoaccount,wemakemulti-memberhouseholdincome
equivalent(p.275) toone-personhouseholdincomeusingthemodifiedOECD
equivalencescale.TheevolutionofhouseholdincomeinequalityinGermanysince1983is
depictedinFigure12.1.ItshowstheGinicoefficientsforthedistributionsofnetand
grossincome,separatelyintheWestandtheEastofGermany.TheevolutionoftheGini
coefficientsforGermanyasawholeisverysimilartotheevolutionforWestGermany.
Figure12.1showsthattheGinicoefficientofthecross-sectionaldistributionofnet
householdincomeinWestGermanywasslightlylessthan0.25intheearly1980sand
aboutthesamelevelofinequalityprevailedattheendofthecentury.After1999,
inequalityrapidlygrewoversixyears,reachedalevelofabout0.28andapproximately
stayedatthathigherlevelafterwards.Incontrasttonetincomes,grossincomesare
computedbeforetaxesandpublictransfersandthoseincomeshadalreadybecame
moreunequalduringthe1990s.ItisapparentfromFigure12.1thatthetaxtransfer
systemsubstantiallyreducescross-sectionalincomeinequalityinGermany.
TheevolutionofincomeinequalityintheEasthasbeensimilartotheoneinWest
Germany,albeitlessstable.Inparticular,theriseininequalityofgrossincomewasmore
pronouncedintheEast.Intermsofinequalitylevels,thereisastrikingdifference
betweenthetworegions:grossincomesaredistributedmoreunequallyintheEastbut,
thankstogeneralgovernmentalredistribution,netincomesaredistributedmoreevenly
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there.However,duringthelastfewyearsinequalityhasbecomemoresimilarinthetwo
regions.
Figure12.1 GinicoefficientsofincomedistributionsforEastand
WestGermany
Source:SOEP,owncalculations;annualincomes,withfrequency
weights.
(p.276) Thegrowthofincomeinequalityhasaffectedbothhouseholdswithrelatively
highincomesandhouseholdswithrelativelylowincomes,asindicatedbyincreasing90/50
and50/10percentileratios.
TheevolutionofpovertyrateshasbeensimilartotheevolutionoftheGinicoefficient.
Aftertaxesandtransfers,thepovertyrate—withthepovertylineat60percentofthe
mediannetequivalenthouseholdincome—exhibitednodistinguishabletrenduntilthe
endofthecentury.Thepovertyraterapidlyincreasedduringthefirsthalfofthe2000s
andthenhardlychangedinthesecondhalf.
Amonggroups,lonemothersandtheunemployedoftenliveinpoverty.Morethanhalfof
allhouseholdsheadedbyanunemployedpersonorbyalonemotherreceiveincomes
belowthepovertyline.Especiallyfortheunemployed,thedecadeofthe2000s
substantiallyincreasedtheirpovertyrisk:itrosefromabout41percenttomorethan56
percent.Alsohouseholdsheadedbyapersonwithoutalicencefromanadvanced
secondaryschool(Abitur)orbysomeoneyoungerthanthirtyaresubjecttoasevere
povertyrisk.Thatriskmoderatelyincreasedforbothgroupsduringthe2000s.
HouseholdslivingintheEastfaceagreaterpovertyriskthantherestofthepopulation
andthatdifferencehasincreasedduringthe2000s.Thisisacontrastwiththe1990s,a
decadeduringwhichthepovertyratesintheEastandintheWestwereconverging.The
incidenceofpovertyoverthelastdecadewasratherstableinthecaseofforeigners—
definedasindividualswhowerenotborninGermany,independentlyoftheirethnic
origin.Perhapssurprisingly,inGermanyneitherblue-collarworkersnortheelderly
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exhibitapovertyratethatsubstantiallydiffersfromthatoftheoverallpopulation.
Unfortunately,theSOEPdatacontainstoofewhouseholdswithveryhighincomesto
accuratelyportraytheverytopoftheincomedistribution.Bachetal.(2013)have
mergedindividualtaxreturnsdatafromadministrativedatawiththeSOEP.Theirincome
conceptishouseholdincomeaftertaxesandtransfers;incontrasttotheprevious
analysis,theydonotuseanequivalencescale.Theyshowthattheshareoftotalincome
receivedbyhouseholdsinthetoppercentilegrewfrom6.78percentin1992to7.91per
centin2005.Itisnoteworthythattheincomeincreaseinthetoppercentilewasvery
unequal,withtheverytopofthedistributionincreasingitsincomesatamuchfasterpace
thantherest.
IncontrasttotheU.S.,topmanagersrepresentinGermanyarelativelyminorfractionof
theverytopoftheincomedistribution.Theoverwhelmingmajorityoftheeconomicelite
ofGermany—definedasthetop0.001percentfractile—consistsofindividualswhose
mainincomesourcesarebusinessactivityandfinancialcapital(Bachetal.,2009).Inline
withthisfinding,theincreaseinincomeconcentrationinGermanyhasbeenparalleledby
adeclineinlabour’sshareofnationalincome.
Animportantaspectoftheriseofinequalityafterreunificationistheincreasingroleofthe
self-employed.Incomefromself-employmentisdistributedmoreunequallythanincome
fromdependentemploymentandtheshareoftheself-employedintheworkforcehas
stronglyincreasedduringthelasttwodecades.
Becauseofdataproblems,theanalysisofGermanwealthdistributionhasbeenhitherto
subjecttoseverelimits.However,someinterestingfactscanbeestablished.First,the
ratioofhouseholdnetwealthtohouseholdyearlyincomeisabout3.5inGermanyand
thatratiohasbeenincreasingoverthelastthreedecades.Second,wealthisdistributed
moreunequallythanincome,andwealthinequalityhasincreasedbetween2002and
2007.Third,householdsintheEastownsubstantiallylesswealththanhouseholdsinthe
West.Theinter-regional(p.277) wealthgapissubstantiallymorepronouncedthanthe
inter-regionaldisparityinincomelevels:householdwealthinEastGermanyisonlyabout
40percentofhouseholdwealthinWestGermany.Fourth,wealthismoreunequally
distributedinEastGermanythaninWestGermany.Aswealthproducesincome,this
contributestoexplainwhymarketincomesaredistributedmoreunequallyintheEast
thanintheWest.Also,inthecaseofwealth,thereisatendencyfortheGinicoefficientsin
thetworegionstoconverge.
LabourMarketInequality
Becauseofitslargerelativesize,labourincomeisamajordirectdeterminantofincome
inequality.ThepictureoftheevolutionoflabourincomeinequalityinGermanyoverthe
lastthreedecadesiscomplex.Usingsocialsecurityrecords,Dustmannetal.(2009)find
thatcross-sectionalwageinequalitywasalreadyincreasinginWestGermanyinthe
1980s,butonlyinthetophalfofthedistribution.Theyalsofindthatintheearly1990s
inequalitystartedtorisefortheentirewagedistribution.UsingdatafromtheGerman
Socio-EconomicPanel(SOEP)andtheGermanIncomeandExpenditureSurvey(EVS),
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Fuchs-Schündelnetal.(2010)confirmtheriseofwageinequalityinWestGermanyafter
reunification,theupwardtrendofinequalitybeingmainlydrivenbyanincreasein
inequalityaftertheyear2000.Bycontrast,theyfindthatinequalitydidnotnoticeably
increaseduringthe1980s.AlsousingtheSOEPdata,GernandtandPfeiffer(2007)find
thatinequalityofwagesforprime-agemaleemployeeswasstableinWestGermany
between1984and1994andincreasedthereafter.Intheperiodofincreasinginequality
theyfindasignificantpositivegapbetweenhigh-tenureandlow-tenureworkersinterms
ofrespectivewagegrowthrates.Theysuggestthattheadjustmentofwagesto
worseninglabourmarketconditionsmainlyconcernedentrantsintothelabourmarket.
ForallworkersinWestGermany,theyfindthatrealwagegrowthatthetenthpercentile
hasbeenslightlynegativesincethemid1990s.Becker(2006)usestheSOEPtocompare
1998and2003intermsofinequalityofhourlywages.Shefindsthatworkerswithouta
full-timejobsufferedfromwagestagnationandthatoverallinequalityincreased,witha
low-paysectoralreadydevelopingbeforethelabour-marketreformsoftheHartz
legislation.Bycontrast,‘withingroup’wageinequalitydidnotchangesignificantly
between1998and2003.
Bachetal.(2009)investigatethedistributionofindividualmarketincomesfortheentire
adultpopulationlivinginGermany.Marketincomeincludes,alongwithwageincome,
incomefromself-employmentandfromcapital.TheyfindasteadyincreaseoftheGini
coefficientintheperiodfrom1992to2003,from0.616to0.652.
Tworemarkabledevelopmentsinearningsinequalityoccurredoverthelasttwodecades.
First,averyrapiddeclineofearningsinequalityatthebottomofthedistributiontook
placejustinthewakeofreunification.Thiswasmainlyduetoapartialcatchingupof
wagesintheregionsoftheformerGDR.Thosewagesstartedfromalowlevelandwere
raisedinafewyearstolevelsclosetothree-quartersofcomparableWestGerman
wages.Second,therewasasubstantialincreaseinearningsinequalityatthebottomof
thedistributionduringthefirstdecadeofthiscentury.
UnemploymenthasbeenamajorcruxfortheGermaneconomyduringthelastthree
decades.TheunemploymentratetrendedupwardsinGermanyuntil2005andstarted
decliningafterwards.Afterreunification,thelevelofunemploymenthassystematically
beenmuch(p.278) higherinEastGermany.Theincidenceofunemploymenthasbeen
especiallyhighfortheindividualswithloweducationalattainment.
TheriseofunemploymentinWestGermanyfromthemid1970stothemid1990sis
usuallyattributedtotheinstitutionalrigidityofitslabourmarket,whichresisteda
downwardwageadjustmentinspiteofcompetitivepressureresultingfromglobalization
andskill-biasedtechnologicalchange.Theriseofunemploymentisthereforeseenasthe
priceforkeepingalowlevelofwagedispersion—thecounter-examplebeingtheUS,
whereinthesameperiodtheunemploymentratewaskeptundercontrolatthepriceof
increasedwagedispersion.
TheexceptionallyhighunemploymentratesintheregionoftheformerGDRmirror
severalfactors,mostprominently:mistakesineconomicpolicythatledtoaccelerateddePage 8 of 30
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Germany
industrialization; 6theabsenceofanentrepreneurialclasswithanetworkoflong-standing
relationships;anexcessivewagepushduringtheyearswhenEasternEuropewas
experiencinganeconomicbreakdown;andadramaticfallinpublicemployment.7
Thepooloftheunemployedisheterogeneous.Alongwithpeoplethatremainunemployed
forashortdurationandthenfindanewjob,thereisagroupoflong-termunemployed
people.Theseareoftenolderpersonsandpersonswithserioushealthproblemswho
cannotworklongerthanafewhours.SincetheHartzreforms,therehasexistedalarge
groupofpeoplewhoatthesametimehaveanofficialjobandreceivetransfersunderthe
sameprogrammeastheonefortheunemployed.Itisestimatedthat,asoftoday,about
1.3millionpeoplecombinelowmarketwageswithsuchpublictransfers.
TheGermanlabourmarketsharesaseculartrendwithallotheradvancedeconomies:
therisingparticipationofwomen.Thefemaleactivityratehassteadilyincreasedoverthe
lastthreedecadesandisapproachingtheratherstableactivityrateofmen.Part-time
employmentismuchmorecommonamongwomen(45.8percent)thanamongmen(9.2
percent).Overall,theshareofworkersinpart-timeemploymenthasincreasedin
Germanyfrom14percentin1991to26.5percentin2009.Someofthatincrease
occurredbecauseofashortageoffull-timejobs.AccordingtoEU-LFS,in2011some
17.1percentofthoseindividualswouldhavepreferredfull-timework.SOEPdata
indicatesthatthegapbetweenthedesirednumberofworkinghoursandtheactual
numberofhoursworkedbypart-timeemployeeshasincreasedsincethesecondhalfof
the1990s(HolstandSeifert,2012).Intermsofoverallfemalelabour-market
participation,GermanytakesamiddlepositionamongOECDcountries.
Labourmarketinequalityisintertwinedwiththedeclineofbothtradeunionsand
collectivebargaining.Tradeunionsusedtoplayakeyroleinthewageformationprocess
intheFRG.Industrialrelationswerecharacterizedbyindustry-levelwagenegotiations,
typicallyledbythemetalworkingindustry.Thissystemhasbeenweakenedafter
reunificationwheninmanycasesfirm-levelbargainingreplacedindustry-levelbargaining,
andopeningclausesincollectiveagreementsallowedforplant-levelderogation.The
unionizationrate,whichwasabout36percentatreunification,hassteadilydeclinedto
abouthalfthatlevel.(p.279) Furthermore,especiallyinEastGermany,manyfirmshave
beguntosettheirwagesunilaterally,withoutanyformalagreementwithunionsor
workerrepresentatives.
Anothermajorinstitutionalchangehasbeentheriseoffixed-termemploymentcontracts.
Theshareofemployeesintemporaryjobshasrisenfromabout10percenttoalmost15
percenttodayinthelastfifteenyears.Temporaryworkerstypicallyreceivelowwages
andfaceahighunemploymentrisk.
WhyhasInequalityGrown?
InGermany,incomeinequalitywasratherstableduringthe1980s.Afterreunification,
theinequalityofmarketincomesandtheinequalityofearningsatthebottomofthe
distributionbegantoincrease.Theincreaseofinequalityatthelevelofprimaryincomes
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acceleratedintheyears2000–2005andinequalitystayedroughlyconstantafterwards.
Bycontrastwithprimaryincomes,post-fiscincomesdidnotbecomesignificantlymore
unequalduringthe1990s.Inequalityofnetincomerapidlygrewintheyearsfrom2000
to2005andstoodatthathigherlevelafterwards.
TherearethreeprominentfeaturesoftheevolutionofGermaninequalitythatneedan
explanation:
1.Theriseintheinequalityofprimaryincomessincereunification
2.Thestabilityofthedistributionofnetincomesduringthe1990s,despitethe
aboveelement
3.Theriseofoverallinequalityin20002005.
Theriseofinequalityofprimaryincomessincereunification.Toasubstantialextent,the
long-runriseofinequalityinthedistributionofmarketincomesinGermanymirrorsthe
growingnumbersoftheunemployedandpensioners,i.e.individualswithzeroorvery
lowmarketincomes,intheoverallpopulation.
InGermany,theearningsdistributionandthewagedistributionshowedaslightincrease
ininequalityaftertheeconomicdownturnof1992–1993.Thismainlyoccurredthrougha
relativeworseningofthepayreceivedbythenewentrantsintothelabourmarket
(GernandtandPfeiffer,2007;Fuchs-Schündelnetal.,2010).Themaindriversbehind
thosechangeswere:skill-biasedtechnologicalchangeintheupperhalfofthedistribution;
immigrationshocksfromEasternEurope;andthedeclineofunionsinthelowerhalfof
thedistribution(Dustmannetal.,2010).Itislikelythatlargeprivatizationsandthe
outsourcingoflow-skilltasksbythepublicsectorcontributedtothegrowthofalowwagesectorinGermany.
Thelong-runriseofinequalityinequivalentgrosshouseholdincomewasalsodueto
compositionaleffects,inparticulartheincreasedshareofpensionerhouseholdsandthe
reducedaveragehouseholdsize.Between1991and2008,thepopulationofGermany
increasedby2.6percent,whilethenumberofone-personhouseholdsincreasedby33.2
percent.AccordingtoPeichletal.(2012),theincreasedinequalityofgrosshousehold
incomesisstronglyrelatedtochangesinhouseholdstructurethathaveoccurredin
Germanyduringthatperiod.
Thestabilityofthedistributionofnetincomesduringthe1990s.Theredistributive
performanceoftheGermantaxtransfersystemstrengthenedinthe1990s,asthe
distribution(p.280) ofpost-fiscincomechangedlittle,despiteanincreasinglyunequal
distributionofpre-fiscincome.Thegenerosityofunemploymentbenefitsremained
relativelyhighduringthe1990s.Withrespecttooldagepensions,theretireeswerestill
benefitingfromthereformsintroducedinthelate1970s.Thatexpansionwas
characterizedbyrelativelyhighreplacementratesandgenerousearlyretirement
provisions(Bönkeetal.,2010).PensionerhouseholdsintheEastbenefitedfromhaving
workhistorieswithnounemploymentspellsandahighlabour-marketparticipationof
women.
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Intheyears1996–98,theburdenofpersonalincometaxwasreducedforlow-income
households(Corneo,2005a).Theaverageincometaxrateforindividualswithlowincome
fellsubstantiallyascomparedto1995,whichhelpedtooffsetzeroorevennegativereal
wagegrowthinthelowestquartileofthedistribution.Furthermore,therewerestrong
increasesinthechildbenefit,startingin1996,thatreducedthepovertyriskforfamilies
withchildren.
Theriseofinequalityin2000–2005.Theimpressiveaccelerationoftheriseininequality
after1999occurredduringaperiodofweakeconomicgrowthandhighunemployment
levels.Toagreatextent,theriseofinequalitywascausedbythepoorperformanceofthe
Germanlabourmarket.Growingunemploymentmainlyhitlow-skilledworkersand
exertedadownwardpressureontheirwages,especiallyinthecaseofnewentrantsinto
thelabourmarket.Inacontextofvanishingunionpower,offirmsrejectingindustry-wide
wageagreements,andofincreasinglyprivatizedpublicservices,therewerefew
institutionalbarrierstoresistsuchapressure.After2003,theHartz-reformsarelikely
tohavecontributedtoputevenmorepressureonthelow-skilledandtofosterlow-pay
employment.Asaresult,wageandearningsinequalityatthebottomofthedistribution
increased.
Thistime,theGermantaxtransfersystemdidnotgeneratetheprogressiveeffectsthat
wouldhavestabilizedthedistributionofpost-fiscincomes.Withregardtotransfers,
currentpensionerscontinuedtobenefitfromrelativelygenerousarrangements
stipulatedinthepast,andtheirpovertyriskhardlychanged.Bycontrast,thepoverty
riskoftheunemployedincreasedsubstantially—asonewouldexpectfromthesubstantial
increaseinearningsinequalityevenwithoutanychangeoccurringinunemployment
benefits.Infact,theHartz-reformsarelikelytohavecontributedtoahigherpoverty
rateamongtheunemployed.Theincreasedincidenceofpovertyamongtheunemployed
in2000–2005canalsoberelatedtothehighunemploymentratesthatprevailedin
Germanyfromthemid1990s.Incontrasttothosewhowereunemployedinthemid
1990s,thepeoplewhowereunemployedduringtheearly2000shadoftenalreadybeen
unemployedforalongperiodandwerethusentitledtolowerbenefits.
TurningtotheGermantaxsystem,during2000–2005itactuallybecameless
progressive,especiallyasaconsequenceoftheincometaxreformenactedinvarious
stepsbythegovernmentofChancellorSchröder(Social-DemocratsandGreenParty)
from1998to2005(Corneo,2005b).Thesubstantialreductionofthetopmarginaltax
rate,alongwithcutsincorporatetaxationandlastingeffectsfromthedemiseofthe
personalwealthtaxin1996/7,contributedaltogethertoincreasingtheconcentrationof
netincomeatthetopofthedistribution.Taxpolicyislikelytohavealsospurredthe
increaseingrossincomesatthetopofthedistribution,e.g.byencouragingtopmanagers
todemandpayincreases.FabbriandMarin(2012)documentamassiveincreaseinCEO
payinGermany,especiallyin2005and2006,justafterasubstantialcutinthetop
marginalrateofincometaxandconsistentlywiththeoriesofcompensationbargaining.
(p.281) Usingadecompositionanalysis,BiewenandJuhasz(2012)haveattemptedto
quantifythestrengthofvariouspotentialdriversofinequalityinGermanyfrom2000to
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2006.Theyfindthatthemaindriverswererisingunemployment,risinginequalityin
marketreturns,andchangesinthetaxsystem.Eachoneofthosethreefactorsisfound
toaccountforaboutonequarteroftheoverallincreaseininequalityofdisposable
equivalenthouseholdincomeinGermanyinthatperiod.
3.TheImpactofInequalityonSocialIndicators
Risingincomeinequalityintheearly2000swentalongwithanincreaseinpovertyrates,
atleastforsomesub-groupsofthepopulation.Thesemonetarilydefinedmeasuresmay
findtheirconsequencesinchanginglivingconditions,inworseninghealthconditions,ina
lackofsocialinteraction,andinanerodingsubjectivewellbeing.However,these
consequencesarenotdeterministic.Someindicatorsofdailylifeexperiencesandconduit
maybeimmunetomoderatechangesinincomeinequality;otherindicatorsmaybe
affectedafteraconsiderabledelay.Thissectionprovidesadescriptionofthe
developmentofsocialindicatorsandrelatesittoincomeinequality.
MaterialDeprivation
Householdswithsignificantincomelossesmaybeabletomaintaintheirmaterialliving
standardforacertainamountoftimebyexploitingexistingresources,forexampleusing
anexistingcarorTV.Hence,wewouldexpectagradualincreaseinmaterialdeprivation
asaconsequenceofgrowingincomeinequalityandunemployment.UsingSOEPdata
from2001–12.2007,wefindanincreaseinmaterialdeprivationfortheentireobservation
period(Figure12.2).8ThelevelofmaterialdeprivationishigherinEastthaninWest
Germany,andtheincreaseismorepronouncedinEastthaninWestGermanyaswell.
Andreß(2006)showsthattheamountofmaterialdeprivationparallelsthedevelopmentof
unemploymentrates,withastrongincreaseinmaterialdeprivationaftertheturnofthe
century.Inthemostrecentyears,materialdeprivationhasbeendeclining(Engelsetal.,
forthcoming).Thus,materialdeprivationseemstocorrelatemorewithdevelopmentsin
unemploymentratesthanwithincomeinequality.
Theincreaseinmaterialdeprivationvariedacrosssocialgroups.Householdswith
tertiaryeducatedmembershardlyexperiencedanincreaseinmaterialdeprivation.
Householdswithoutacademicdegreeshavebeenincreasinglyconfrontedwithcutsin
thestandardof(p.282)
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Figure12.2 Shareofmateriallydeprivedhouseholds(as%)
Source:SOEP,owncalculations.
living.Forpoorpeople,therateofmateriallydeprivedpoorhouseholdsjumpedfrom
about30percentto40percent.Theremarkableincreaseforthisgroupsuggeststhat
poorhouseholdsincreasinglysufferfromtheirfinancialsituation.
SocialInteractions
Growinginequalityandpovertyratesmayresultinformsofsocialdeprivationaswell.
Peoplecouldbelesswilling,lessinclinedorlessabletoseeotherpeopleandinteract
withthemonadailybase.UsingdatafromtheSOEP,theISGresearchinstitute
(forthcoming)summarizesthefrequencyofcontactswithfriends,relativesand
neighbours.Onaverage,(p.283) between21.5and23.6percentofthepopulationdo
nothavecontactswiththeirpeersatleastonceamonth.Forthefirstdecadeofthe
2000s,thereisnocleartrendinthesenumbers.Wefindsomewhathigherratesofsocial
exclusionforpoorpeopleandforless-educatedpeople.Thehighernumbersforless
privilegedpeopleraisequestionsaboutthecapacityofoursocietytoavoidalienationfor
thesegroups.
SubjectiveWellBeing
Incontrasttotheprevioussocialindicators,measuresofsubjectivewellbeingaremore
pronetoreactinstantaneouslytochangesinincomeinequality.TheSOEPdataprovide
measuresofanindividual’ssatisfactionwithlifeingeneral,withherorhishealthandwith
householdincome.Thelong-termtrendsofthesemeasuresexhibitsomefluctuations
between1995and2009(Figure12.3).Forthetimeperiodbetween2000and2005—the
periodofgrowingincomeinequality—wefindadeclineinlifesatisfaction,health
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satisfactionandincomesatisfaction.However,thevariationinthesesatisfactionmeasures
beforeandaftertheriseofincomeinequalitydoesnotspeaktoasystematiccorrelation
ofincomeinequalityandsatisfaction.
Onaverage,peopleinWestGermanyaremoresatisfiedwithaspectsoftheirlifethan
peopleinEastGermany.Thedifferenceisabout0.3and0.8pointsonan11-point-scale.
Peoplewithsecondaryorprimaryeducationarelesssatisfiedwiththeirsituationsthan
tertiaryeducatedpeople.Again,astarkcontrastexistsbetweenpoorpeopleandnonpoorpeople.Theaveragedifferencebetweenthesegroupsrangesbetween0.4points
forhealthand2.2pointsforincomesatisfaction.Poorpeopleshowlittletendencyfor
healthsatisfaction,especiallynotatthebeginningofthemillennium.Lifesatisfaction,
however,declinedinthefirstyearsofthe2000s.Evenmorepronouncedisthe
developmentofincomesatisfactionduringthattime.Incomesatisfactionplummetedfor
thisgroupbyabout0.8points.Thedropafter2003,inparticular,suggeststhatthis
developmentmayberelatedtothenewlyintroducedlabourmarketreformsandthe
reformsinsocialassistance(seeSection5).
SocialMobility
Anincreaseincross-sectionalinequalitymaybelessdamagingtothesocialfabricifitis
accompaniedbyincreasedmobility.UsingSOEPdata,Goebeletal.(2011)present
incomedynamicsoutofincomequintileswithina4-yearperiod.AsshowninFigure12.4,
about66.5percentofpeoplefromthehighestincomequintilein1985remainedinthis
quintileatleastuntil1988.Likewise,about57.3percentofthepeoplefromthelowest
incomequintilein1985remainedinthisquintileatleastuntil1988.Thetrendsovertime
showremarkablestabilityforpeopleinthehighestquintile.Thefindingforthebottomof
thedistributionismarkedlydifferent.After2000,theproportionofpeoplewhowerenot
abletoleavelow-incomeconditionsroseto65.2percent.Thus,theriseincross-sectional
inequalityinGermanywasnotaccompaniedbymoreincomemobilitybutratherbyan
increaseddifficultyinescapingpoverty.9
(p.284)
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Figure12.3 Generalanddomain-specificsatisfactionfornon-poor
andpoorpeople(11-point-scale)
Source:SOEP,owncalculations.
Overall,wefindlittlesupportforcorrelationsbetweenincomeinequalitydynamicsand
thedevelopmentofsocialindicators.Formaterialdeprivationandsocialinteractions,
thereislittleevidenceofconcomitanttrends.Forlife,healthandincomesatisfaction,we
findtrendlessfluctuationinthelongrun.However,wedofindshort-termtrendsof
decliningsatisfactionthatparalleltheincreaseinincomeinequalityintheearly2000s.The
mostprominentfindingsconcernthepoor.Materialdeprivationrisesforthepoorandthe
increaseincross-sectionalpovertyratesatthebeginningofthemillenniumisnot
matchedbyanincreasedlikelihoodofclimbinguptheincomeladder.
(p.285)
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Figure12.4 Incomedynamicsforselectedincomequintiles
Source:Goebeletal.,(2011),owngraphicaldisplay.
4.PoliticalandCulturalImpacts
Incomeinequalityposesachallengetosocialcohesionandpoliticalstability.Highlevelsof
inequalityinducecorruption,socialdistrust,badgovernance,andweakpoliticalsupport
(NewtonandZmerli,2011;Rothstein,2011;Uslaner,2008,2011).Thelatterisa
prerequisiteuponwhichthelegitimacyofdemocraticregimesdepends.Aspectsofsocial
cohesionandinstitutionalsettingsareintrinsicallyrelatedtothefabricofsocial
structures.Individualpoliticalattitudesarenotonlyshapedbypersonalexperiencesbut
bycollectivesocio-tropicperceptions(Kumlin,2004).Theseperceptionsrelatetomacrolevelphenomenasuchaseconomicperformance,unemploymentandincomeinequality.10
Notwithstanding,someeconomictheoryorphilosophicalschoolsofthoughtwouldargue
infavourofinequality,pointingeithertoitsfunctionasaneconomicincentiveortothe
rightfulnessofbenefitingfromone’sownendowments(Roemer,2011).
ThefollowinganalysismainlyfocusesonbehaviouralandattitudinaltrendsinEastand
WestGermanyduringtheprevioustenyears,theperiodoftimecoveringthemost
pronouncedincreaseininequality.
(p.286) Voting
Astheofficialstatisticaldataonvotingdepict,turnoutinGermannationalelectionswas
highthroughoutthefirstthreedecadesaftertheSecondWorldWarandreachedits
peakatthebeginningofthe1980s,withaturnoutofnearly90percentatthenational
electionin1983(Figure12.5).11 Sincethen,asteadydeclineinturnouthassetin,
resultinginadifferenceinturnoutsofnearlytwentypercentagepointsfrom1983tothe
mostrecentnationalelectionin2009.TheprocessofGermanunificationdoesnotappear
toaccountforthispronounceddownwardtrend.Inbothpartsofthecountry,turnout
duringthemostrecentnationalelectionwasatanall-timelow,althoughEastGermans
haveconsistentlyhadlowerturnoutratesthanWestGermansinprecedingelections.
Takingthetrendsofthelasttwentyyearsintoconsideration,thedropinthepercentage
shareofvoterswhichoccurredduringthemostrecentelectionin2009isparticularly
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striking.
AninvestigationofthefivewavesoftheEuropeanSocialSurveydata(ESS,2002to2010)
substantiatesthenotionofdivergingvotingbehaviourbetweenEastandWestGerman
citizens.Differentiatingbyeducationaldegreerevealsforbothregionsthatturnoutrates
ofpeoplewithatertiaryeducationaldegreehavebeenthehighestandmoststableover
thefirstdecadeofthe21stcentury.Whileturnoutratesforcitizenswithprimary
schoolinghavebeenlowestandfluctuatingovertime,theinitiallyhighturnoutratesof
citizenswithsecondaryschoolinghavedeclinedsince2002.Overall,awidening
participatorygapbetweencitizenswithtertiaryeducationandcitizenswithprimaryand
secondaryschoolingcanclearlybediscerned.
Figure12.5 Votinginnationalelections,in%
Source:FederalStatisticalOffice;DerBundeswahlleiter,2009a,
2009b.
(p.287) TrustinOthersandPoliticalInstitutions
WeinvestigatethetrendsofpoliticaltrustusingdatafromtheGermanGeneralSurvey
(ALLBUS),whichcoverstheperiodbetween1984and2008.Theempiricalresultsare
complementedbythefivewavesoftheESS.
AsshownbyALLBUS,trustinthelegalsystemhasbeenremarkablystableovertime
withtheexceptionofadeclineinthecourseofthe1980s.Thecomparisonbetweenthe
formerGDRandFRGdisclosesapronouncedperceptualdivide.Whilenearlyfiftyper
centofWestGermanssteadilyexpresstrustinthelegalsystem,EastGermansare
somewhatlessinclinedtodoso.
InspectingtrustattitudesbyeducationallevelbasedonESSdatarevealsforbothparts
ofthecountryasignificantdecreaseamongstpeoplewiththelowesteducational
achievement.Thesameholdstrueforsecondarydegreeholders,albeittoalesser
extent.Tertiaryeducationdegreeholdersexperienceanoutstandingboostintrustinthe
legalsystem—inparticularintheeasternpartofthecountry.Risinglevelsofinequality,
whichdisproportionallyaffectlowerandmiddleclasshouseholds,couldberelatedto
theseremarkabledevelopments.
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TrustintheGermannationalparliament(Bundestag)hasbeenexpressedbylessthan
onethirdoftheGermanpopulationsincethebeginningofthe1990s,accordingtodata
drawnfromALLBUS.TheEast/Westcomparisonrevealsanothersignificantperceptual
divide.WhilealittlelessthanathirdofWestGermansexpresstrustintheGerman
Bundestag,lessthanonefifthofEastGermancitizenssharethesametrustfulattitude.In
addition,astheWestGermancross-educational-levelanalysisofESSdatasuggests,the
threecategoriesmaintainobservable‘betweengroup’differences,withtheprimary
educationdegreeholdersastheleasttrustfulcitizens(Figures12.6and12.7).ForEast
Germany,aparticularlysharpdropintrustcanbeobservedfortheleasteducatedwith
onlyapproximatelyonetenth
Figure12.6 Trustinparliament,WestGermany,byeducation
Source:ESS(alsoFigures12.7–12.11).
(p.288)
Figure12.7 Trustinparliament,EastGermany,byeducation
ofcitizensexpressingatrustfulattitude.Citizenswithatertiaryeducationdegree
contrastthisconsistenttrendofdecliningtrustlevels.Consideringpotentialsourcesof
thisdisturbingdevelopment,increasinglevelsofinequalitycouldprovideonepartofthe
explanation.
TurningtoGermans’levelsofsocialtrust,theESSdatadepicthowlevelsandtrendsof
socialtrustdifferacrosseducationaldegrees(Figures12.8and12.9).Inbothregions,
tertiarydegreeholdersarethemosttrustful.Inaddition,EastGermanswithtertiary
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degreesexperiencethehighestpercentageshareincreaseovertimeresultingina
remarkablecross-educational‘trustgap’.AsimilardiagnosisalsoappliestoWestGerman
citizensdespitedifferentunderlyingtrends.Whilepeoplewithtertiaryschooling,byand
large,maintaintheirhighpercentagesharesoftrust,secondaryandprimarydegree
holdersbecomeincreasinglydistrustfulovertime.Aconcomitantdevelopmentwithrising
levelsofinequalitycouldbeonepotentialexplanatoryfactor.
PoliticalValuesandLegitimacy
Withregardtoattitudesofsocialtolerance,aquitesmallpercentageshareofGermans
stronglyopposesimmigrationofpeopleofdifferentraceaccordingtothefivesurveysof
theESS.12Apartfromsomefluctuationsin2004and2006,onlyaslightincreaseamongst
theentireGermanadultpopulationcanbeobserved.However,thisincreasingtrendin
2004,andhighlevelsin2006coincidewithpatternsofincreasinginequalityaccompanied
bypessimistic(p.289)
Figure12.8 Socialtrust,WestGermany,byeducation
Figure12.9 Socialtrust,EastGermany,byeducation
prospectsfortheunemployed.Theobservabledecreasefrom2008onwardswith
concomitantdecreasingunemploymentratescouldrepresentanotherindicatorofthis
inter-relatedness.ThecomparisonbetweenEastandWestGermansdepictssocietal
attitudinaldifferences.Whileinbothpartsofthecountrynoteworthyfluctuationscanbe
discerned,onlyEastGermanstendtorejectimmigrantsofdifferentracein2010more
thantheydidadecadebefore.
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(p.290)
Figure12.10 Don’tallowdifferentrace,WestGermany,by
education
Fromacross-educational-levelperspective,remarkabledifferencesbetweeneducational
categoriesemergeinbothpartsofthecountry(Figures12.10and12.11).InWest
Germany,aconsiderablegapexistsbetweencitizenswithprimaryeducationwhohave
risinglevelsofdismissiveattitudes,andthetwoothereducationalcategoriesthathave
declininglevelsofstronglyopposingviews.AslightlydifferentpatternprevailsinEast
Germany,wherearemarkablegapexistsbetweencitizenswithprimaryandsecondary
education,depictingincreasinglevelsovertime,ontheonehand,andcitizenswith
tertiaryeducationwithdecreasingsharesofstronglyopposingviews,ontheother.Rising
levelsofinequalityandhighratesofunemployment,whichdisproportionallyaffectlower
andmiddleclasshouseholdscouldberelatedtothesedevelopments.
ValuesaboutSocialPolicyandWelfareState
InlinewithincreasinglevelsofinequalityinGermany,thepercentageshareofGermans
whostronglybelievethatincomedifferencesaretoolargeintheircountryhasdoubled
from1987to2009,asdataderivedfromdifferentwavesoftheInternationalSocial
SurveyProgramme(ISSP)indicate(Figure12.12).Nevertheless,thereisnosteadily
increasingtrendbutconsiderablyfluctuatingsharesofcorrespondingresponses.The
sameholdstruefortheEast/WestGermancomparison:inbothpartsofthecountry,
therearestronglyfluctuatingpercentagesharesofstrongbelieversinthepresenceof
toolargeincomedifferenceswhichultimatelyresultinaremarkableincreaseafteratime
periodofmorethanfifteenyears.Particularlynoteworthyisanotherstrongperceptual
differencebetweenEastandWestGermans,whichvariesfromtwentytothirty
percentagepoints.
Breakingdowntheseattitudesbylevelsofeducationalattainmentrevealsthestrongest
increasesinpercentagesharesforcitizenswithprimaryandsecondaryeducational
degrees(p.291)
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Figure12.11 Don’tallowdifferentrace,EastGermany,byeducation
Figure12.12 Differencesinincometoolarge,stronglyagree,ISSP
inbothpartsofthecountry.EastGermancitizenswithatertiaryeducationdegree,by
contrast,aretheonlygroupcategorywithdecreasingsharesofstrongaffirmative
respondents.
AccordingtoISSPdata,hardlyonefifthofthe(West)Germanpopulationin1987strongly
agreedwiththegovernment’sresponsibilitytoreduceincomedifferences(Figure
12.13).Despitesomefluctuationsovertime,thecorrespondingpercentageshareof
citizensrosetoapproximately(p.292)
Figure12.13 Government’sresponsibilitytoreducedifferences,
stronglyagree,ISPP
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thirtypercentin2009.TheEast/Westcomparison,however,stressesthepersisting
intra-societaldivide.Fromtheoutsetoftheunificationprocess,EastGermansattributed
asignificantlygreaterroletothefederalgovernmentinreducingincomedifferencesthan
WestGermansdid.
Turningtotheinterrelatednessbetweeneducationaldegreeandone’sassessmentof
government’sresponsibilityinWestGermany,theISSPdatarevealsupwardtrends
duringtheperiodofthestrongestincreaseininequalityforallthreecategories.As
expected,peoplewiththelowesteducationalattainment,andthepotentiallyhighestriskof
beingdependentonredistributivepolicies,havetwicetheprobabilityofstrongly
agreeingwiththisstatementthanpeopleholdingthehighesteducationaldegree.East
Germans,bycontrast,followaslightlydifferentpattern.Citizensholdingtertiary
educationdegreesappeartobetheleastaffectedbytheencompassingupwardtrends.
Asaresult,thecorrespondingattitudinalgapbetweenthelowestandmiddle-range
educationaldegreeholdersandpeoplewiththehighestlevelofschoolingisincreasingly
widening.
5.TheRoleofPolicy
TheHartzReforms
TheHartz-reformsofthelabourmarketwereintroducedbythesecondSchröder
governmentinfourstepsfrom2003to2005andmainlyfollowedtheapproachof
‘negativeactivation’,withbenefitcutsfortheunemployedandatighteningofthesanction
regime.Theyalsoincludedfiscalinducementsforsmalljobsandself-employment,a
deregulationoftemporaryworkandare-organizationofthepublicagenciesinchargeof
theunemployed.
(p.293) In2003,theHartzIandHartzIIlawswerepassed.Inparticular,they
involved:atighteningoftheobligationtoworkfortransferrecipients(obligationtotake
upajobevenifitdiffersfromownprofession);theestablishmentofagenciestoplace
peopleintemporaryemploymentandderegulationoftemporaryemployment;the
broadeningofminoremploymentbymeansofsocialsecurityexemptions(Mini-andMidiJobschemes,akindofearnedincometaxcredit);afinancialsupportformini
entrepreneurs(socalled‘MeInc.’).
TheHartzIIIlawof2004furthertightenedthesanctionregimefortheunemployedand
createddistinctivepublicofficesofjobsearchfortheunemployed(Jobcentre)that
concentratedtaskspreviouslydispersedacrossvariousinstitutions.Anotherlawinthe
sameyearreducedthemaximumdurationofunemploymentbenefits.Thedurationfor
whichadismissedworkercanreceiveunemploymentbenefitsreducedremarkablyfor
almostallagegroups.Alsothetimeperiodapersonhastohavebeenemployed,subject
tosocialsecuritycontributions,inordertogainarighttounemploymentbenefits,was
raised:fromaminimumofsixmonthstotwelvemonths.Severalofthesemeasureseither
presentedformalconstitutionaldeficienciesorproducedpoliticallyunacceptableresults
sothattheyhadtobeamendedorabolishedaltogether.Inpart,thisalsoappliestothe
finalandmostprominentpieceofthelabour-marketreforms,theHartzIVreform.
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Germany
In2005,withregisteredunemploymentapproachingthe5millionbar,theHartzIV
reformwasintroduced.Priortothatlaw,thebenefitsystemconsistedofthreelayers:
unemploymentinsurance;unemploymentassistance;andsocialassistance.Thesecond
layerimpliedthatunemployedindividualsreceivedmeans-testedearnings-related
unemploymentassistanceaftertheexhaustionofunemployment-insurancebenefits.The
durationofunemploymentassistancewasbasicallyindefinite.HartzIVabolished
unemploymentassistanceandbasicallysubstituteditwithsocialassistance.13Thosewho
wouldhavereceivedunemploymentassistanceintheoldsystemhadnowtoapplyforthe
new,means-tested,unemploymentbenefitII(ArbeitslosengeldII).14Inmostcases,the
resultingtransferincomeissignificantlylowerthanintheprevioussystem.However,the
newsystementailsstrongerincentivesfortransferrecipientstosupplementthetransfer
bytakingupsomework,althoughtheimplicitmarginaltaxratesontheearningsafterthe
thresholdofdisregardremainhigh.
Overall,theHartzreformsentailedasignificantrejuvenationofactivelabourmarket
policyinGermany.Intermsofparticipants,themostsuccessfulprogrammehasbeenthe
publicjobcreationIIscheme(1-Euro-Jobs).Thatprogrammeismainlytargetedatlongtermunemployedpeoplewhoreceivemeans-testedsocialassistance.Inordertoreintegratethemintothelabourmarket,theymustaccepttoworkfornon-profitemployers
undersomeconditions.TheFederalEmploymentAgencypaysthemasmallamount,
whichisnotcreditedagainsttheirsocialassistance.
TheconsequencesoftheHartzlegislationforlabourmarketoutcomesandincome
inequalityarenotyetentirelyunderstood.Thereisaconsensusthattheyhave
contributedtothesubstantialincreaseinso-calledatypicalemployment(e.g.,marginal
part-timeworkpartiallyexemptedfromsocialsecuritycontributions).By2011,onlytwo
thirdsofemployeesinGermanyweresubjecttosocialsecuritycontributionsand,hence,
eligiblefor(p.294) unemploymentbenefits(BundesagenturfürArbeit,2011).Marginal
part-timeworkisnowamajorformofemploymentintheretail,cleaning,andthe
hospitalitysectors.ItislikelythattheHartzreformscontributedtoincreasingthelabour
supplyoflow-skilledworkers.Inturn,thatincreaseinsupplyisboundtoexerta
downwardpressureonthewagesofthelow-skilled.Benefitabuseisthoughttohave
becomelessfrequent,whilebureaucraticload,heavycontrolsandlegaldisputesbefore
thecourtshaveincreased.Theofficialunemploymentratehassubstantiallydecreasedin
thewakeoftheHartzreforms.
TaxPolicy
Duringthelasttwodecades,Germantaxpolicyhasoftenbeenframedintermsof
reactiontomountinginternationaltaxcompetition.Thecorporatetaxratestoodat56per
centinthe1980sintheFRG.Itwassubsequentlyreducedinseveralsteps,especially
duringtheyearsoftheSchrödergovernment.Since2008,thecorporatetaxratein
Germanyhasbeenmerely15percent.
Corporations,especiallybanks,stronglybenefitedfromthetotalabolitionofcapitalgains
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Germany
taxesonthesalesoflargeshareblocks,decidedonbytheSchrödergovernmentin2000.
ThisoccurredatatimewhentheGermancompanynetworkcentredaroundmajorbanks
wasalreadyeroding.Theexemptionofcapitalgainsfromtaxationacceleratedits
dissolution,whichinturnledtopmanagementtoassignhigherprioritytoshareholder
value.Companiescarefullyexploitedthetimingofthetaxreformtofirstdeductcapital
lossesfromtheirtaxliabilitiesandthenrealizetax-freecapitalgains.Thefiscallossesto
thepublicbudgetweresevere.
Germanyhadapersonalwealthtaxuntil1996,which,inthatyear,generatedarevenue
equivalenttoabout€4.6Billion.Thattaxwasdeclaredunconstitutionalbythefederal
constitutionalcourtbecausedifferentkindsofwealthwerebeingtreatedtoodifferently.
Since1997,thepersonalwealthtaxhasnotbeenlevied.
Theinheritancetaxisalong-standingelementoftheGermantaxsystem.Someitemsof
thebequeathedestatebenefitfromspecialexemptionsandevaluationmethodsthatlead
toasevereerosionofthetaxbase.Thisholdstrueinparticularforbusinesswealth,
whichisalmosttax-exempted.
Personalcapitalincomewastaxeduntil2008withintheprogressivetaxonpersonal
income.Since2009thishasnolongerbeenthecase,asakindofdualsystemoftaxation
hasbeenintroduced.Incomesfrominterests,dividends,andfinancialcapitalgainsare
nowsubjecttoa25percentflat-ratewithholdingtaxandareexemptedfrompersonal
incometax.Bycontrast,thetopmarginaltaxrateonremainingpersonalincomesis45per
cent.Bothtaxesentailanadditionalsolidaritysurchargeof5.5percentofthetaxliability,
whichenhancestheprogressivityoftaxation.
Whileregressivetaxreformswereoftenblamedoninternationaltaxcompetition,the
Germangovernmentdidnotgeneratemuchinternationalcooperationtofighttaxevasion
andavoidance.Incontrasttoothercountries,Germanysteadilyrefusestoprovidebank
informationautomaticallytoforeigntaxauthorities,iftherecipientofinterestincomeisa
foreigner.
(p.295) Table12.1displaystheeffectoftheincometaxreformoftheSchröder
governmentsfrom1998to2005ontherealnetincomesofsingletaxpayers,ascalculated
fromtheevolutionofstatutorytaxrates.Itshowsthatforthebulkoftaxpayers,the
reformdirectlyincreasedrealnetincomesbyroughlyfivepercent.Theincomegains
weremuchhigherfortaxpayersinthetoppercentileoftheincomedistribution.Byway
ofanexample,somebodywithanannualtaxableincomeof€500,000experiencedanet
incomeincreaseofabouttwentypercent.
Thereformof1998–2005alsoaffectedthetaxbasisoftheincometax.Whilethedecrease
ofeffectiveaveragetaxrateshasbeenacrosstheboard,ithasbeenespecially
pronouncedforhouseholdswithveryhighincomes.Bywayofanexample,theaverage
taxrateforthetop0.001percentgroupdroppedfrom43percentin1998to31per
centin2005(Bachetal.,2013).
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Germany
Taxesandtransferssubstantiallyreducecross-sectionalincomeinequalityinGermany:
theGinicoefficientisreducedbyroughly40percentwhenoneshiftsfromthe
distributionofgrossincometothedistributionofnetincome—seeFigure12.1.The
inequality-reducingimpactofthetaxtransfersystemincreasedduringthesecondhalfof
the1990s,whereasitbecameslightlyweakerduringthe1980sandthe2000s.The
successofpolicyincombatinginequalityduringthesecondpartofthe1990sispartly
duetotwomeasuresthatwereimplementedin1996:asubstantialincreaseinthebasic
allowanceforthepersonalincometaxandasubstantialincreaseinchildbenefit.Both
measureshadbeencalledforbytheFederalConstitutionalCourt.
Table12.1Effectoftheincometaxreform1998–2005
Taxableincome
Realnetincomegrowth
10,000
4.94
20,000
5.27
30,000
4.77
40,000
4.34
50,000
4.44
60,000
5.15
70,000
6.78
80,000
8.36
90,000
9.65
100,000
10.72
200,000
16.41
300,000
18.43
400,000
19.69
500,000
20.4
1,000,000
21.87
Source:Corneo(2005b).
(p.296) 6.Conclusions
Intermsofcross-sectionalincomeinequality,theFRGoftodayisquitedifferentfromthe
FRGofthe1980s.Inthe1980s,theFRGwasoneofthemostegalitariancountriesinthe
world.Inequalityofpre-fiscincomesbegantoriseaftertheeconomicdownturnof1992–
1993,andkeptgrowinguntilthemid2000s.Thedistributionofpost-fiscincomechanged
littleduringthe1990s.Intheperiod2000–2005itbecamesubstantiallymoreunequal
andthelevelofinequalitydidnotsignificantlychangeinthesubsequentperiod.This
overalltendencyforinequalitytogrowwasparalleledbyamutationoftheGermansocioeconomiccompact:itstraditionalcorporatistmodelimportedanumberofelementsfrom
theAnglo-Saxonone,givingrisetoanoriginalhybridmodel.Byinternationalcomparison,
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Germany
Germanystillhasarelativelyegalitarianincomedistribution,butduringthe2000s
inequalityhasmountedmorerapidlythaninmostotherOECDcountries.
Inthe1980s,thepressureexertedbyglobalizationandskill-biasedtechnologicalchange
didnotleadtosignificantlymorewageinequalityinGermanybutrathertoincreased
unemployment.Thankstotheshort-livedpost-reunificationboom,inequalitydidnotrise
inthefirstfewyearsafterreunification.Inthesequel,equality-preservinginstitutionslike
tradeunions,industry-levelbargaining,regulatedlabourmarketsandpublicownership
weretodeclineirreversibly,allowingforagradualincreaseofwagedispersion.The
adjustmentoftheearningsdistributionleftcoreworkersrelativelyunaffectedandmainly
hitentrantstothelabourmarket.Inthatrespect,theworkforceinEastGermany
constitutedahugegroupofentrants.Sincereunification,collectivewageagreements
havecoveredasubstantiallysmallershareoftheworkforcetherethanintheWest.Since
aboutthemid1990s,marketincomeshavebeendistributedmoreunequallyintheEast
thanintheWestofGermany.
Reunificationandtheworldwidedemiseof‘realexistingsocialism’alsoimpliedachanged
toneinthepoliticaldiscourse,whichbecamemorereceptivetofreemarketideology.
However,inthefirstyearsafterreunification,nofar-reachingneoliberalreformscould
beintroduceddespiteacentre-rightgovernment.Meanwhile,additionalfactorswere
makingthedistributionofmarketincomesinGermanymoreunequal.Atthebottomofthe
distribution,alargeinflowofmigrantsfromEasternEuropeintotheGermanlabour
marketputpressureonthewagesoflow-andmedium-skilledworkers.Atthetopofthe
distribution,theriseofshareholdervalue,financialmarkets,andmarketsforsuperstars
droveanincreaseinincomeconcentration.Changesintheagestructureofthe
populationandtheerosionoftraditionalfamilyarrangementsfurthercontributedto
generateamoreunequaldistributionofmarketincomes.
Theresilienceofequalityintermsofpost-fiscincomeduringthe1990s—despite
increasedpre-fiscinequality—canbetracedtothedelayedeffectsofsocialpolicy
measures,e.g.generousrulesforcomputingpensionbenefits.Furthermore,the
FederalConstitutionalCourtrepeatedlyexhortedthegovernmenttoadjustthetax
transfersystemsoastoguaranteethatthedisposableincomeofindividualsdidnotfall
shortofaminimumthreshold.Thesubsequenthikesinchildbenefitandinthebasic
allowanceofpersonalincometaxcontributedtocombatinequality.
Thegovernmentlaunchedtwomainwavesofreforms:ataxreformstartingin1998and
theHartzlegislationforthelabourmarketin2003–2005.Empiricalstudiesindicatethat
the(p.297) taxreformsstrengthenedtheriseofinequalitybuttheevidenceonthe
effectofthelabourmarketreformsislessclear-cut.Inperspective,thepensionreform
of2001,whichsignificantlyreducedfuturepensionrights,islikelytoincreaseinequality.
GrowingincomeinequalityhasnotgoneunnoticedbyGermans.Mostnoticeably,people
atthepoorerendoftheincomedistributionfaceincreasingdifficultiesinovercoming
theirprecarioussituation.Theyexperiencemorematerialdeprivationandsocial
exclusion.Forthemainpartofthepopulation,however,socialindicatorsfluctuateover
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Germany
timewithoutanysystematiccorrelationwithtrendsinincomeinequality.Political
disenchantment,socialintoleranceanddemandsforredistributivepolicies,however,
showaconcomitanttrendtotheriseofinequality.EastGermans’andlesseducated
people’sattitudesseemtobeespeciallyaffectedbythesedevelopments.Insum,the
repercussionsofrisinglevelsofincomeinequalityseemtohavealreadyimpairedcitizens’
relationshipwiththedemocraticstate.
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Notes:
(1)ThischapterisbasedonthecorrespondingGINIGermancountryreportwhich
encompassesamultitudeoffurtherin-depthanalysesandcanbedownloadedat
www.gini-research.org/CR-Germany.
(2)OwncalculationbasedonGermanSOEPdata.Unlessstatedotherwise,allstatistical
factsmentionedinthischapterappearinpublicationsoftheGermanFederalStatistical
Office.
(3)UnemploymentmeasuredaccordingtotheharmonizedOECDdefinitionislower,but
itsevolutionissimilar.
(4)Theentireemploymentgrowthoccurredintheservicesector.
(5)ForGermanyasawhole,themedianageoftheresidentpopulationincreasedfrom
36.4yearsin1980tothecurrent44.3years.
(6)IntheEast,employmentinmanufacturingdroppedbetween1991and1993by60
percentandkeptdeclininguntil1997.Thepublicagencyinchargeofprivatizingthe
formerGDRfirms(Treuhandanstalt)operateduntiltheendof1994,andthen
bequeathedtheGermangovernmentafinanciallossofabout240billionGermanMarks.
(7)From1991to2009,thepublicadministrationnarrowlydefinedlostabouthalfofits
staffintheEast.
(8)Theindexofmaterialdeprivationisbasedonelevenitems:possessionofacolourTV;
phone;car;replacementofoldfurniture;goodconditionoftheresidentialbuilding;good
neighbourhood;abilitytopayingrent/mortgageontime;toputmoneyasidefor
emergencies;togoonvacationonceayearforoneweek;toinvitefriendstodinnerat
leastonceamonth;andtheabilitytoeatahotmealwithmeat,fishorpoultryatleast
everyotherday.Householdsareconsideredtobemateriallydeprivedifatleastfourof
thoseitemsarenotaffordable.
(9)BartelsandBönke(2013)havestudiedincomevolatility,takingthechangesovertime
inthecompositionoftheSOEPintoaccount.Whiletheydofindanincreaseinearnings
volatilityatthebottomofthedistribution,theydonotfindmuchchangeinthevolatilityof
nethouseholdincome.
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(10)TheseargumentsarederivedfromCastilloandZmerli(2012).
(11)Inordertobetterpresenttheexpectedrelationshipbetweeninequalityandpolitical
involvement,mostofthesubsequentGINIscalesonthesecondaryy-axisaredepictedin
reversedmanner.
(12)ThequestionwordingintheESSreads:‘Howaboutpeopleofadifferentraceor
ethnicgroupfrommostofGermany’speople?’(Thepreviousandrelatedquestion
wordingwas:‘Now,usingthiscard,towhatextentdoyouthinkGermanyshouldallow
peopleofthesameraceorethnicgroupasmostofGermany’speopletocomeandlive
here?)
(13)Thereishoweverasupplementarytemporarybenefitforuptotwoyearsafter
transitingfromunemploymentbenefitsintosocialassistance.
(14)Currently,about70percentoftheunemployedreceivethatbenefit.
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