European Economy. Economic Papers. Germany's growth performance in the 1990's

Figure 3.15 : Real compensation per employee 
(index 1991 =100 ; GDP deflator)
Wage differentiation across skills levels and regions
The unemployment pattern of low-skilled workers clearly indicates a flaw in the wage
formation process, because a lack of differentiation of wages according to skills has priced low-
skilled workers out of the market. As in many continental EU countries, wage inequality in
Germany is relatively low compared to the US or the UK. An analysis of socio-economic panel
data for West Germany (Prasad (2000)) shows that the wage dispersion decreased slightly from
the mid-1980s until the mid-1990s; then it started to increase again. Over the whole period
1984-1997, the increase of real wages was slightly stronger at the high tail of the wage
distribution.
One explanation for the existence of a wage floor for low-skilled workers is institutional
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:
Typically, sectoral collective agreements fix a factor (e.g. +2.5%) by which wages for all
workers of the concerned industry are increased, irrespective of their occupation and skills level.
This uniform movement has the effect that within sectors the wage dispersion is very inflexible.
The wage structure can become even more compressed, if the agreement foresees a lump sum
payment on top of the percentage increase, which is also current practice (cf.
Sachverständigenrat (2000)). Then, low wages increase more strongly, in percentage terms, than
high wages, thereby exacerbating the risk that the cost of low-skilled labour rises above its
productivity. The situation tends to be aggravated when high-skilled workers are in short supply
and have the power to exert pressure for strong wage increases. Furthermore, pattern bargaining
46
For a discussion of wage floors due to reservation wages see below, sub-section 4
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tends to strengthen the uniformity of wage developments also across industries. A survey
among German firms (Franz/Pfeiffer (2001)) confirms that collective agreements are seen as a
major impediment for wage flexibility especially in the low-skills segment.
Wages do not sufficiently reflect the regional labour market situation to reduce the large
regional unemployment disparities. The most striking example is the rigidity in East German
wages after the strong increases in the early 1990s. What is potentially more relevant for the
future growth potential is the striking rigidity of relative wages in the second half of the 1990s,
given that the unemployment rate in the New Länder is twice as high as the national level and
given that employment is stagnant and the labour volume continues to decrease. In fact, at 113%
of the West level, unit labour costs had the same relative disadvantage in 2000 as in 1994. Table
3.14 shows the convergence of unit labour costs across sectors. In construction, the initial
misalignment had been absorbed by the mid-1990s. In recent years, however, under-utilisation
of capacities drove unit labour costs up again. In manufacturing, the sector where competition is
strongest, the differential has disappeared by now, however, this was achieved through
enormous labour-shedding: Of the over one million job losses in the East industry in net terms
from 1991 to 2000, almost 900,000 occurred in manufacturing. The adjustment of the cost level
has lead to a stagnation of employment in this sector since 1997, but has not been sufficient to
reverse the trend (Table 3.15). Finally, in the service sector unit labour costs adjustment is still
rather far from completed and progress mixed. Given that the services sector in East Germany
was initially very small, employment has been dynamic anyway, especially in the segment of
financial and business services.