The Role of Wage and Skill Differences in US-German Employment Differences.

The most popular explanation for greater job creation in the US than in Germany is that greater dispersion of wages coupled with less regulations governing the labour market and the product market in the US has induced firms to employ many less skilled workers. While popular, these explanations turn out to be difficult to prove empirically. Based on the Comparative German American Structural Database and the International Adult Literacy Survey we find that: employment rates differ more than unemployment rates by skill levels and overall; German and US relative pay by level of skill was similar in 1970 but diverged in the 1980s; the German work force is more skilled than the US work force especially at the lower skill levels; the employment of skilled to unskilled labour within industries is unrelated to country differences in skill premium but changes in relative wages are related to changes in relative employment; and the differing dispersion of wages is not a major contributor to differences in employment rates between Germany and the US. The jobs problem in Germany is not primarily one of relative labor demand but of demand for labor in general.