Wage Effects of the Move toward Free Markets in East Germany

Abstract

This analysis of data from the German Socio-Economic Panel (SOEP) for the years 1989–91 illuminates important changes in the structure of wages that were occurring in the former East Germany during its transition toward a capitalist economy—and changes that are probably occurring in other countries in Eastern Europe as well. Under the new capitalist wage regime, workers realized significant returns to schooling gained under socialism, but no significant returns to work experience. Because work experience is the largest element in the human capital of older workers, their wages fell under the new system; and the results suggest that their wages will continue to fall relative to those of younger workers. Generous transfer payments from western Germany may prevent an absolute decline in living standards of these workers. Older workers in other eastern countries, however, will have no such social assistance, and their living standards will probably fall.