Can Employment Changes Explain Rising Income Inequality in Germany?

From 2000 to 2005, Germany experienced an unprecedented rise in net equivalized income inequality and poverty. At the same time, unemployment rose to record levels and overall employment stagnated, suggesting that changes in households’ conditional employment outcomes were partly responsible for the observed inequality increase. Using DiNardo/Fortin/Lemieux’s semiparametric kernel density reweighting method, we examine what part of the inequality and poverty increase can be accounted for by changes in households’ conditional employment outcomes. Our results suggest that employment outcomes explain only some 14 percent of the observed inequality increase, and some 23 percent of the observed poverty increase, leaving much room for the contribution of other factors.