Does Low-Pay Persist across Different Regimes? Evidence from German Unification

Using German administrative data, we study across-regime low-pay persistence in the context of an economic transformation process. We first show that individuals' initial allocation to the post-unification low-wage sector was close to random in terms of market-regime unobservables. Consistent with a weak connection between individuals' true productivity and their pre-unification low-wage status, the extent of across-regime state dependence is found to be small and appears to vanish over time. For males, across-regime state dependence is most pronounced among the medium- and high-skilled, suggesting the depreciation of human capital as an explanation.

Diegmann, André and Nicole Gürtzgen (2020), Does Low-Pay Persist across Different Regimes? Evidence from German Unification, The Economics of Transition and Institutional Change 28 (3) , 413-440