ON THE POST-UNIFICATION DEVELOPMENT OF PUBLIC AND PRIVATE PAY IN GERMANY

German post-unification in the 1990s is a period marked by substantial economic and political change, a crucial part of which was a largely politically motivated attempt to build East German wages towards the much higher West German wages. We study the development of the public-private sector pay gap in Germany in the 1990s. We show that throughout the 1990s the overall pay gap between the public and private sectors remained stable in the West and increased considerably in the East. Wage decompositions show a small and stable negative public sector premium in the West, and a large and increasing positive public sector pay premium in the East. Decompositions also show a considerable deterioration in the skill base of the private sector in the East which the paper attributes in part to the improved attractiveness of the public sector. The paper argues that the development in the size and composition of the public-private sector pay gap in the East is an indication of the public sector crowding out the private sector and raises concerns about the future competitiveness of the East. Copyright © 2007 The Authors; Journal compilation © 2007 Blackwell Publishing Ltd and The University of Manchester.