This paper examines to what extent marital sorting affects cross-sectional
earnings inequality in Germany over the past three decades, while explicitly
taking into account labor supply choices. Using rich micro data, the observed
distribution of couples' earnings is compared to a counterfactual of randomly
matched spouses. Hypothetical earnings are predicted based on a structural
model of household labor supply. For West Germany, a positive effect of
marital sorting on inequality is found after adjusting for labor supply behavior,
while the effect is limited when earnings are taken as given. This means that
there is positive sorting in earnings potential which is veiled by relatively low
female labor force participation. In East Germany, the impact of marital
sorting on inequality is highly disequalizing irrespective of adjusting for labor
supply choices. This is mainly due to the fact that East German women are
much more attached to the labor market.
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