Accounting for Selection Effects in the Analysis of Wage Inequality in Germany
The objective of this project is to analyze the rise of wage inequality in Germany over the last decades and to contribute to the literature on the rise in wage inequality in industrialized countries. For an assessment of the drivers for the observed changes in the wage distribution and the wage differences between labor market groups, it is important to take into account that the selection into paid work may change over time and may differ across groups. In light of employment fluctuations, long-term employment growth, rising female labor force participation, and a shift towards part-time work, composition changes are very im-portant for the analysis of wage inequality in Germany. This project aims to quantify the differences in wage distributions between groups and over time that are free of differences in observed and unobserved worker characteristics and to assess the importance of composition differences. So far, this project has analyzed the composition and wage structure effects of observable characteristics, using the reweighting approach by DiNardo et al. (1996) and the RIF regression approach of Firpo et al. (2014) and selection on unobservables has been controlled for using the method of Albrecht et al. (2009) in the analysis of the gender wage gap. There exists only a small but recently very active methodological literature on how to control for selection on unobservables in the analysis of outcome distributions, see Huber and Melly (2015), Arellano and Bonhomme (2016), and D’Hautefoeuille et al. (2017) for recent contributions.
The project proposal for the second funding period consists of five parts: Part 2A extends work from the first project phase and explores in detail the methodological issues involved in estimating quantile regres-sion for wage data with selection correction. This part aims to make a methodological contribution building on recent developments in the literature and serves as a methodological basis for the empirical analysis in the second funding period. Part 2B estimates quantile regressions with selection correction for a detailed analysis of the evolution of wages over time. We extend the previous work by also analyzing as to why the increase in wage inequality in Germany has come to an end in 2010. This part will focus on the suitability of different datasets and the suitability of different instruments to control for selection into paid work based upon unobservables. Part 2C analyzes the gender wage gap, while also correcting for selection on unobservables considering a wide range of methodological approaches. Part 2D addresses the question of how the considerable educational expansion has influenced the quality and the returns to educational degrees. We shall study the hypothesis that increasing enrollment in higher education has deteriorated the average quality of graduates and thus reduced the returns to higher education. Part 2E analyzes the relationship between changes in individual labor market transitions and the evolution of wages. In partic-ular, we will focus on the effects of increasing incidence of temporary part time work and the notable increase in male part-time work. We account for the impact of transitions between different employment states and temporary interruptions of employment on changes in the wage distribution.