Human Capital and Income Differences: Germany's Reunification as a Natural Experiment

Wolfgang Dauth, Sang Yoon (Tim) Lee and Sebastian Findeisen

No 948, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We exploit Germany's reunification as a natural experiment to study the contribution of human capital for income differences and the mechanisms behind it. Using a detailed administrative data set, which follows over 15 million workers over their life-cycle, we show that they are very strong cohort effects in the wages and earnings of Eastern Germans. We find clear graphical evidence and results from non-parametric models that these strong cohort effects are driven by the differential exposure of cohorts to the communist versus the decentralized market systems. Decomposition exercises show that such cohort effects are mostly driven by cohort-varying wage profiles, which can be explained by differences in the frequency of job switches across cohorts. Migration and education effects matter less.

Date: 2018
New Economics Papers: this item is included in nep-eur
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