Low pay dynamics , economic transition , state dependence
Abstract:
This paper studies whether the transition from a centrally planned to a market economy offers new perspectives for those who, in economic terms, were
relatively deprived under the old regime. Previous empirical research on this question has been limited by the availability of representative longitudinal
micro-data that track individuals' labour market careers across different political regimes. Our study seeks to fill this research gap by looking at the
transition of Eastern Germany following German Unification. Using a unique large-scale German administrative data set, we measure individuals' relative economic position by exploiting information on whether individuals were in the bottom of the pre-unification wage distribution. We then address the
question of how workers' low or high-wage status determines their wage and labour market status within and across different regimes. We document strong
evidence of a dynamic selection process into low-wage employment after Uni-fication. Furthermore, consistent with a weak connection between individuals' true productivity and their pre-unification low-wage status, the extent of across regime state dependence is found to be small in magnitude and appears
to vanish over time. For males, the small extent of across regime dependence is found to be most pronounced among the medium and high-skilled, suggesting the depreciation of general human capital as a potential explanation.
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