Worsening income inequality in Germany in recent decades is the result of a combination of factors that includes less effective state redistribution mechanisms, according to a paper from academics in Düsseldorf.

The paper examines the main drivers of the rise in income inequality observed over the period 1991–2010. 

Key findings

• According to the Gini coefficient, inequality in Germany increased by 12.7 per cent between 1991 and 2010. The central period – from 2000 to 2005 – saw an increase of 13.4 per cent, followed by a slight fall in more recent years.
• Cyclical and structural changes in the labour market are one explanatory factor. These include demographic trends (such as declining household size), the increasing significance of atypical employment, and a rising wage spread among full-time employees.
• In addition, however, net income inequality has grown as a result of the decreasing redistributive effect of taxes and public transfers. Most significantly, the design of tax and social security contributions, as well as the rising relevance of value-added taxes, have had negative redistributive effects for low-income households.
• In the latest period, from 2006 to 2010, strong jobs growth in Germany helped to reverse some of the previous rise in inequality. But it seems 'remarkable' that inequality did not decrease any further, the paper's authors say, given the economic circumstances. They point to the fact that wage inequalities continued to worsen during this period, and that the low-paid sector continued to expand.

Source: Kai Daniel Schmid and Ulrike Stein, Explaining Rising Income Inequality in Germany, 1991-2010, Macroeconomic Policy Institute (IMK), Düsseldorf
Link: Paper