German income inequality

Stefan Bach, Giacomo Corneo, Viktor Steiner, 11 June 2007

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Paul Krugman frequently mentions that America’s super rich make the 19th Century wealthy look poor. “We know what John D. Rockefeller, the richest man in Gilded Age America, made in 1894 … $1.25 million, almost 7,000 times the average per capita income in the United States at the time.” Krugman wrote. ”But that makes him a mere piker by modern standards … James Simons, a hedge fund manager, took home $1.7 billion, more than 38,000 times the average income.”

Surely such extremes cannot happen on Continental Europe with its social market economics and social solidarity. The authors of Policy Insight No. 4 shows that although income inequality in Germany is a long way from reaching US proportions, the trend is in that direction. Germany rich are getting richer, and its super-rich are getting super-richer.
Inequality of market incomes in Germany, as measured by standard summary indicators such as the Gini coefficient, moderately increased in the period from 1992 to 2001. This finding is consistent with those reported in previous studies that failed to incorporate both tails of the income distribution. However, we have found that standard summary measures of inequality disguise important changes in the distribution of market incomes. On the one hand, a third of the German population receives almost no market income, and the share of market income going to the middle deciles sharply declined since the early 1990s. Consequently, median market income declined substantially, both in absolute terms and relative to mean income.

Inequality of market incomes in East Germany increased much more than in the West and the decline in median market income was especially severe in the East. This is a likely consequence of the marked decline in full-time employment and increase in unemployment in East Germany. Demographic factors and economic forces, such as skill-biased technological change and globalization, seem in Germany to affect the distribution of market incomes more by increasing unemployment and reducing working hours than by increasing earnings differentials across the bulk of full-time workers.

On the other hand, the average income of the top deciles significantly increased in Germany, relative to overall mean income. The average real income of Germany’s economic-elite increased by roughly a third between 1992 and 2001. The super-rich did even better, as they saw their market incomes rise by more than 50% in real terms. The composition of income according to its sources is very different for the top of the income hierarchy and the rest of the German population. The predominance of entrepreneurs and capitalists within top income groups seems to be much stronger in Germany than in the US or France. However, the rapid increase of the share of wage income in German top income groups suggests that a convergence process might have started.

URL:  http://www.cepr.org/pubs/PolicyInsights/CEPR_Policy_Insight_004.asp

Topics:  Labour markets

Tags:  Germany, income inequality

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