The East German Wage Structure in the Transition to a Market Economy

An important question for the development of the East German labour market in the transition to a market economy is whether wage differentials by qualification, industry or region which were relatively small in the former GDR adjust to those in market economies which are more in line with differences in productivities and economic conditions. We estimate empirical earnings functions to quantify the contribution of various important factors shaping the earnings distribution in the East German transition process. Estimation is based on the first six waves of the Labour Market Monitor which is a representative panel data set of the East German workingage population covering the period 1990 to 1992. The specification of the estimated earnings functions is motivated by the various hypotheses of the development of the East German wage structure in the transformation process. Although we do find some similiarities with the existing wage structure in West Germany, the East German wage structure still differs in some important dimensions. Acknowledgement: We thank Michael Burda and the participants of seminars at the ZEW in Mannheim and at the the EALE meeting in Warszaw for helpful comments on an earlier version of this paper. The second author would also like to acknowledge financial support from the German Science Foundation (Deutsche Forschungsgemeinschaft) under the project "Arbeitsmarkdynamik, individuelles Erwerbsverhalten und Einkommensentwicklung im TransformationsprozeB".