Skill Premiums and the Supply of Young Workers in Germany

In this paper, we study the development and underlying drivers of skill premiums in Germany between 1980 2008. We show that significant increase medium-to-low premium since late 1980s was almost exclusively concentrated among workers aged 30 or below. Using a nested CES production function framework which allows for imperfect substitutability young old workers, changes relative labor supplies can explain these patterns very well. A cohort-level analysis reveals distinct secular educational attainment native population are primary source declining supply medium-skilled Germany. Low-skilled immigration, contrast, only plays secondary role explaining rising lower-end wage inequality over recent decades.