Industrial change, stability of relative earnings, and substitution of unskilled labor in West-Germany

We analyze the dramatic decline of the employment share of unskilled labor in the West German economy, in particular its relation to the relatively rigid earnings structure. We find that the substitution elasticity between unskilled and skilled labor is rather low in most sectors of the economy. However, the substitution elasticity is relatively high for males in the construction sector and for females in personal services. In these sectors, earnings of unskilled workers have even increased relative to skilled workers in the observation period. Hence, in these sectors reductions in the relative earnings of unskilled workers could have contributed to the stabilization of their relative employment level. In other sectors of the economy, the decline in the skills ratio, i.e. the employment share of unskilled relative to skilled workers, attributable to an inflexible earnings structure seems to have been modest compared to the trend decline in the skills ratio. The skills ratio has declined by about 3% (6%) per year for men (women). This decline has been relatively uniform across sectors of the economy. Potential effects of intensified international competition and skill-biased technological change on the relative employment and earnings position of unskilled workers are also discussed. We find some modest effects from international competition and technological change on the employment share of unskilled labor in the manufacturing sector.