Wage Rigidities in Western Germany ?

This paper investigates whether and in what sense the west German wage structure has been ‘rigid’ in the 1990s. To test the hypothesis that a rigid wage structure has been responsible for rising low-skilled unemployment, I propose a methodology which makes less restrictive identifying assumptions than some previous related work. I find that the relative stability of educational wage premia was justified by market forces. However, relative wages did not respond to negative net demand shocks for young workers, as well as white-collar workers. Acknowledgement I thank the Centre for European Economic Research (ZEW), Mannheim, for letting me work with the full sample of the German Socio-Economic Panel. This research was partly supported by the Volkswagen Foundation. I am grateful to Michael Lechner, Markus Frölich, Ruth Miquel, SIAW, University of Sankt Gallen, Rob Euwals, IZA, Bonn, Herbert S. Buscher, ZEW, Mannheim, participants of the CEPRIZA European Summer Symposium in Labour Economics 2001, Buch, Germany, participants of the Meeting of the Econometrics and Statistics Study Group of the Swiss Society for Economics and Statistics, University of Berne, Switzerland, and participants of the Department of Economics, University of Sankt Gallen, Brown Bag Seminar, for helpful comments. All remaining errors are my own.