Multidimensional Well-Being at the Top: Evidence for Germany

This paper employs a multidimensional approach for the measurement of well-being at the top of the distribution using German SOEP micro data. Besides income as traditional indicator for material well-being, we include health as a proxy for nonmaterial quality of life as well as self-reported satisfaction with life as dimensions. We find that one third of the German population is well-off in at least one dimension but only one percent in all three dimensions simultaneously. While the distribution of income has become more concentrated at the top, the concentration at the top of the multidimensional well-being distribution has decreased over time. Moreover, health as well as life satisfaction contribute quite substantially to multidimensional wellbeing at the top which has important policy implications.Multidimensional measurement, well-being, Germany

Inequality in Germany: The Role of Household Context and the Concept of Economic Resources

Economic inequality has increased considerably in many Western countries and has recently received increasing attention. The gap between rich and poor is now one of the main issues on the policy agendas and is potentially harmful for public welfare when it exceeds a certain threshold. That is why many policy makers are concerned with increasing levels of inequality. Economists should, therefore, provide an objective basis for decision making with regard to redistributive policies. This dissertation contributes to the literature on economic inequality with a special focus on Germany. Conducting analysis of inequality requires a decision on the exact research subject. This is concerned with the underlying concept of economic resources as well as the extent to which the household context is involved. The studies presented in this thesis differ with respect to both dimensions. The main results are briefly summarized here. Chapter 2 addresses the literature on the dispersion of individual earnings and deals with a very specific case of a wage gap by testing for an earnings premium for German members of parliament (MPs) in 2006. The analysis is based on a unique dataset of German MPs and representative German microdata. After controlling for observable characteristics as well as accounting for election probabilities and campaigning costs, we find a positive earnings premium for MPs which is statistically and economically significant. The results are consistent with the citizen candidate model when comparing politicians to citizens occupying executive positions. However, it shrinks to zero when restricting the control group to top level executives. Hence, answering the question whether the pay of MPs is appropriate is not straightforward and, in turn, depends on the appropriateness of the underlying control group. Chapter 3 extends the analysis of earnings inequality beyond the individual level and considers the household context and studies the role of marital sorting on inequality of couple earnings while taking into account labor supply behavior of spouses. I measure the effect of non-random sorting of spouses on inequality across couple households in West Germany from 1986 to 2010 by matching couples randomly to each other and predicting counterfactual labor supply choices. This allows me to quantify the pure effect of sorting in earnings potential rather than observed earnings. Using German microdata as well as a behavioral microsimulation model, I find that the impact of observed sorting on earnings inequality among couples turned from slightly equalizing to slightly disequalizing in recent years, but is generally rather neutral with regard to inequality. However, after adjusting for labor supply choices, I find that sorting in productivity has a much stronger impact on earnings inequality. This is mainly due to positive correlation in earnings potential and increases in female employment that are more concentrated in the upper part of the distribution. From a policy maker's perspective, this result implies a trade-off between policy measures promoting female labor force participation on the one hand and redistributive policies on the other hand. Chapter 4 quantifies the effect of changes in household composition, especially decreasing household size, on the distribution of total household income and pays special attention to the role of the tax and transfer system in Germany. Changes in household formation are associated with income inequality, since economies of scales in household consumption are more and more lost. The case of Germany is of special interest in this respect since the demographic development is, among other things, characterized by a sharp fall in average household size. Using German microdata, we find that the growth of the income gap between 1991 and 2007 is indeed strongly related to changes in household composition. The result for income inequality before taxes and transfers is much larger than the result for inequality indisposable incomes. This means, that the tax-benefit system largely compensates for inequality due to changes in household composition. Hence, the welfare state implicitly provides incentives affecting individual and household choices with respectto living arrangements. Finally, chapter 5 extends the analysis to the stock dimension of economic resources and looks at the joint distribution of household income and wealth at the top and introduces a family of multidimensional measures of affluence. The analysis is concerned with the role of both income and wealth for the top of the distribution. The proposed multidimensional affluence measures allow for the analysis of the extent, intensity and breadth of affluence within a common framework. We illustrate this by analyzing the role of income and wealth as dimensions of multidimensional well-being in Germany and the US in 2007, as well as for the US over the period 1989-2007. Using comparable microdata, we find that, in general, both dimensions are equally important for multidimensional a uence. However, we find distinct country differences with the country ranking depending on the measure. While in Germany wealth predominantly contributes to the intensity of affluence, income is more important in the US

Multidimensional affluence: Theory and applications to Germany and the US

This paper suggests multidimensional affluence measures for the top of the distribution. In contrast to commonly used top income shares, they allow the analysis of the extent, intensity and breadth of affluence in several dimensions within a common framework. We illustrate this by analyzing the role of income and wealth as dimensions of multidimensional well-being in Germany and the US in 2007 as well as for the US over the period 1989–2007. We find distinct country differences with the country ranking depending on the measure. While in Germany wealth predominantly contributes to the intensity of affluence, income is more important in the US.top incomes, multidimensional measurement, richness, wealth, inequality

Multidimensional Well-Being at the Top: Evidence for Germany

This paper employs a multidimensional approach for the measurement of well-being at the top of the distribution using German SOEP micro data. Besides income as traditional indicator for material well-being, we include health as a proxy for nonmaterial quality of life as well as self-reported satisfaction with life as dimensions. We find that one third of the German population is well-off in at least one dimension but only one percent in all three dimensions simultaneously. While the distribution of income has become more concentrated at the top, the concentration at the top of the multidimensional well-being distribution has decreased over time. Moreover, health as well as life satisfaction contribute quite substantially to multidimensional wellbeing at the top which has important policy implications.multidimensional measurement, well-being, Germany

Marital sorting, inequality and the role of female labor supply : evidence from East and West Germany

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

Does Size Matter? The Impact of Changes in Household Structure on Income Distribution in Germany

Income inequality in Germany has been continuously increasing during the past 20 years. In general, this is understood as an increase in inequality of wages due to changes in bargaining power of employees. However, the role of changing household structure is widely neglected. Societal trends like a decline in birth rate and an increase in the risk of divorce affect per capita incomes, which has repercussions for the income distribution even if wages remain constant. The aim of this paper is to quantify the proportion of changing household structures in the increase in inequality. We find that the rise in inequality was indeed more due to changes of household structure and employment behavior rather than changes in wages. Moreover, a large part of this increase is compensated by the welfare state.income distribution, demography, household size, decomposition, Germany

The Politicians' Wage Gap: Insights from German Members of Parliament

Using a unique dataset of German members of parliament with information on total earnings including outside income, this paper analyzes the politicians' wage gap (PWG). After controlling for observable characteristics as well as accounting for selection into politics, we find a positive PWG which is statistically and economically significant. It amounts to 40-60% compared to citizens with an executive position. Hence, we show that the widely held claim that politicians would earn more in the private sector is not confirmed by our data. Our findings are robust with respect to potential unobserved confounders. We further show that the PWG exceeds campaigning costs and cannot be justified by extraordinary workload. Hence, our results suggest that part of the PWG can be interpreted as rent extraction. This calls for a reform of the regulation of outside earnings, which account for a sizeable share of the wage premium.Politicians' wage gap, descriptive representation, citizen-candidate model, political rents, outside earnings

Does Size Matter? The Impact of Changes in Household Structure on Income Distribution in Germany

In Germany, two observations can be made over the past 20 years: First, income inequality has been constantly increasing while, second, the average household size has been declining dramatically. The analysis of income distribution relies on equivalence-weighted incomes which take into account household size. Therefore, there is an obvious link between these two developments. The aim of the paper is to quantify how the trend towards smaller households has influenced the change in income distribution. In order to do so, we are using a decomposition of changes in inequality measures over time allowing for a separation between wage and demographic effects respectively. We propose similar decompositions for the change in poverty and richness as well and compare them with results that were obtained by a re-weighting procedure. Our results show that the income gap would also have increased without the demographic trend. But its level would be lower than it actually is. In addition, the demographic effect turns out to be larger for incomes before tax and benefits.Germany, decomposition, household size, demography, income distribution

The politicians’ wage gap: insights from German members of parliament

Using a unique dataset of German members of parliament (MPs) this paper analyzes the politicians’ wage gap (PWG). After controlling for observable characteristics as well as accounting for election probabilities and campaigning costs, we find a positive income premium for MPs which is statistically and economically significant. Our results are consistent with the citizen candidate model: The PWG amounts to 35–65% when comparing MPs to citizens in an executive position. However, it shrinks to zero when restricting the control group to top-level executives. This suggests that German politicians do not receive excessive pay when compared to senior executives.politicians’ wage gap; citizen-candidate model; office remuneration; outside earnings

Shifting taxes from labor to consumption : more employment and more inequality

This paper investigates the effect of shifting taxes from labor income to consumption on labor supply and the distribution of income in Germany. We simulate stepwise increases in the value-added tax (VAT) rate, which are compensated by revenue-neutral reductions in income-related taxes. We differentiate between the personal income tax (PIT) and social security contributions (SSC). Based on a dual data base and a microsimulation model of household labor supply behavior, we find a regressive impact of such a tax shift in the short run. When accounting for labor supply adjustments, the adverse distributional impact persists for PIT reductions, while the overall effects on inequality and progressivity become lower when payroll taxes are reduced. This is partly due to increases in aggregate labor supply, resulting from higher work incentives