PP 1764/2: Accounting for Selection Effects in the Analysis of Wage Inequality in Germany

The objective of this project is to analyse the rise of wage inequality in Germany over the last decades. For an assessment of the drivers for the observed changes in the wage distribution and the wage differences between labour market groups, it is important to take into account that the selection into paid work may change over time and may differ across groups. In light of employment fluctuations, long-term employment growth, rising female labour force participation, and a shift towards part-time work, composition changes are very important for the analysis of wage inequality. This project quantifies the differences in wage distributions between groups and over time that are free of differences in observed and unobserved worker characteristics. So far, this project has analysed the composition and wage structure effects of observable characteristics, using the reweighting approach by DiNardo et al. (1996) and the RIF regression approach of Firpo et al. (2014). Selection on unobservables has been controlled for using the method of Albrecht et al. (2009) in the analysis of the gender wage gap. There exists only a small but recently very active methodological literature on how to control for selection on unobservables in the analysis of outcome distributions, see Huber and Melly (2015), Arellano and Bon-homme (2016), and D'Hautefoeuille et al. (2017).