Do inequalities rise after German reunification ? : an analysis based on micro-census data

Abstract

The creation of a monetary and economic union between different countries leads to several changings mainly if the countries concerned by the unification are countries with different levels of development and living standards. Then, in this case, it is interesting to study the evolution of inequalities between the different countries and within the union. An example of monetary and economic union is the German reunification were the West and East parts of Germany were unified in one country, Germany. Following this reunification, many studies have been made on the evolution of inequalities between Eastern and Western Germany. Whereas, few studies focused on the overall evolution of inequalities in Germany after the unification. In this paper, we are going to add grist to the mill on the discussion about the trajectory of income inequalities after the German reunification. To know the evolution of inequalities in Germany, we want to focus on the top income of the income distribution. To have a good representation of the evolution of income inequalities, we are going to study the impact of top income on the inequalities, and we are going to determine which social class is the driver of inequalities. This process will allow us to develop a new way to measure or explain the evolution of inequalities by focusing on the extreme quantile of the income distribution. Concerning the results of this research, it is demonstrated that all things being constant, top income impacted the inequalities negatively as it appeared that top income increased over time following an upward trend. Then, we observed that the macroeconomic variables seemed to have a positive impact on extreme income as it appeared that the macroeconomic variables impacted the top income positively or at least impacted less negatively top income owners than the rest of the population whose income depends mostly on wages. To determine if the rich becoming richer or the middle-class being proportionally more is the driver of inequalities, we regressed the estimated shape parameter of the income distribution of the rich on the Gini coefficient. We found a positive relationship between our measure of inequalities and the Gini coefficient. The combination of the positive relationship between the 𝜉" and the Gini coefficient and the upward trend discovered in the estimated shape parameter would explain the increasing trend discovered in the Gini coefficient. However, the results of the regression are not robust as we do not have enough data to draw relevant conclusions. This regression marks the limit of our model. The idea of explaining the inequalities trough top income does not allow us to make relevant conclusions but only suppositions as we do not know the behavior of the income of the rest of the population. The conclusion of this paper opens the door to new fields of discussion on income inequalities focusing on top income and shows how our model can predict the evolution of top income through the evolution of the GDP growth rate, the inflation, the population growth rate, the interbank interest rate three months and the unemployment rate.