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Income and wealth inequality after the financial crisis: the case of Germany

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Abstract

The topic of rising income inequality does not only gain in relevance since the two prominent reports by the OECD (Growing unequal? Income Distribution and Poverty in OECD Countries, Paris 2008; Divided we stand—Why inequality keeps rising, Paris 2011) but rather since the financial crisis. So far there is only scarce empirical evidence–besides a rather broad literature dealing with the US–about the consequences of the financial crisis on income inequality in Europe (e.g. Jenkins et al. in The Great Recession and the distribution of household income, Oxford University Press, Oxford 2013) and more important about wealth inequality (Lundberg and Waldenström in Paper presented at the 4. SEEK conference, Mannheim 2014). In this paper we focus on the short-term distributional effects in Germany, as this country was one of the OECD countries which had been hit hardest—as measured by a decline in GDP—by the Great Recession in 2008/2009. The underlying data source comes from the German Socio Economic Panel which is a representative longitudinal survey of private households in Germany. This survey provides consistent yearly information about incomes since 1984 and for wealth in at least three survey years. Thus, we are able to identify any potential effects of the financial crisis on incomes (e.g. earnings, market income, post-government income) and wealth components (e.g. property, business assets, financial assets, net worth) and their respective inequality in Germany. Our main finding is that we do not find any significant distributional changes during the Great Recession. However, the Great Recession temporary froze the income structure while afterwards income mobility tries to make up leeway. Findings of a factor decomposition showed as expected that the relative contribution of capital income to overall inequality lost in relevance during the Great recession. Several factors attenuated the impact of the Great Recession and will be discussed in detail.

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Notes

  1. The Great Recession in Germany last for 12 months between Q2-2008 until Q1-2009 measured by quarter-on-quarter changes of seasonally adjusted real GDP.

  2. Long-term effects of the Great Recession will be a topic for future research.

  3. This imputation technique has been also applied to the Australian HILDA panel survey (Watson and Starick 2011). For more details about income imputation in SOEP see Frick and Grabka (2005) and the respective imputation quality compared to other prevalent imputation techniques see Watson and Starick (2011).

  4. On the relevance of entitlements to public pension schemes see Frick and Grabka (2010).

  5. As is the case in other wealth surveys worldwide financial assets are significantly underestimated in SOEP compared to figures from the National accounts with a share of only 33 % in 2012 for aggregate gross financial assets. Additionally, top wealth households are typically underrepresented in population surveys like the SOEP, thus lead to an underestimation of the true degree of wealth inequality.

  6. Confidence intervals are generated using the bootstrap method with 500 replications.

  7. In order to consider the findings by Alvaredo et al. (2013) about the relevance of the top 1 % earners we also controlled for the mean and median of annual labor income for the top 1 % employees and find again no significant change during the Great Recession.

  8. Figures from the national accounts about aggregate compensation for employees confirm our findings. Here no drop occurred but rather a slight increase even during the Great Recession of at least 0.3 % in 2009 took place. Thus the most important income component of private households in Germany–namely labor income–did not suffer from the Great Recession but only yield to below average increases.

  9. Two common inequality indicators will be applied for the analysis of income. This is the Gini-coefficient as an inequality indicator which is sensitive to changes in the middle of the distribution and the mean-log deviation which belongs to the class of entropy inequality measures, which is sensitive to changes at the lower end of a distribution. For the wealth analyses we primarily focus on the Gini coefficient but complement this by using percentiles and percentile ratios.

  10. Besides changes in the labor market inequality has been affected by demographic shifts in recent years towards an increasing share of elderly in Germany e.g. from 16.6 in 2000 to 20.6 % in 2010 (Federal Statistical Office 2013), and as a result, the share of people with no or only low market incomes is increased.

  11. Post-government household income consists of market incomes, statutory pensions as well as state transfer payments such as child benefits, housing assistance, and unemployment benefits, minus direct taxes and social security contributions.

  12. One reason for stagnating real incomes is the weak development of pensions in the statutory pension insurance scheme. For example, pensions rose in the last 10 years in all years below the inflation rate thus leading to real losses of about 15 %.

  13. The small but insignificant increase for the most recent year maybe partly the result of a new subsample in SOEP, which showed below average incomes and thus may lead to a small change in the overall income distribution.

  14. One explanation for this unusual observation is that unemployment decreased primarily in households which already had a strong labor market attachment and thus had already incomes above the poverty threshold, while households with a low labor market attachment tend to remain in unemployment which is supported by the stable number of long-term unemployed in Germany.

  15. This has been implemented in Stata by Jenkins (2009).

  16. This finding goes along with an increasing share of individuals in Germany having negative net worth (Grabka and Westermeier 2014).

  17. In a robustness check a factor decomposition using the Gini-coefficient was applied (by making use of sgini.ado provided by van Kerm 2010). In principle the general findings are confirmed, however, on a somewhat lower level as the coefficient of variation used in the foregoing decomposition is more sensitive to changes at the upper end of the income distribution.

  18. At least the share of employees working overtime decreased during the Great Recession from about 50 % in 2006 to <40 % in the first half of 2010 (Grabka and Frick 2013). However, this information is only available in qualitatively terms, since no information about the level of overtime bonuses is collected in SOEP.

  19. Using a window of two survey waves better enables analyzing the short-term effects of intra-generational mobility than longer periods.

  20. Nevertheless movements within the very same decile are not interpreted as mobility here.

  21. However, there has been very little research into the causes and mechanisms of income mobility in Germany to date (e.g. Riphahn and Schnitzlein 2011), merely indications that increasing (wage) inequality is associated with the trend toward lower (wage) mobility (Buchinsky and Hunt 1999).

  22. For more details about the measurement and interpretation of various income mobility indices see Jäntti and Jenkins (2013).

  23. It must be taken into account that, like other similar studies, the SOEP does not entirely cover the upper margin of the distribution of wealth, thus underestimating it, as billionaires or multi-millionaires are not or only insufficiently included in the sample. When making use of information from the World Wealth report of Capgemini and RBC Wealth Management (2014) the number of high-net worth individuals with assets of at least US$1 million (excluding primary residence, collectibles, consumables, and consumer durable) decreased in Germany from 826.000 in 2007 by 1.9 % in 2008. However, since then the number of HNWIs strongly increased by almost 40 % to 1,130 million in 2013.

  24. This result may be partly driven by the increase of the share of owner-occupiers in Germany. Owner occupied property is the quantitatively most important wealth component and in particular relevant in the upper half of the wealth distribution (see also Grabka 2014).

  25. STC is beneficial not only for employers but also for employees. STC payments in Germany have the same replacement rate as regular unemployment benefits: 60 % for single workers and 67 % for workers with dependents. Employer costs are also subsidized extensively. In the first 6 months, the employer has to pay only 50 % of social security contributions and beginning with the seventh month, all social security contributions are reimbursed. In some cases, employers do not even have to cover wages—for example, if workers are undergoing training.

  26. Other European countries were also able to cushion households from the immediate effects of the Great Recession by means of benefits and other social safety nets, which stabilized household net incomes in these countries (Jenkins et al. 2013).

  27. The car scrappage scheme came into effect in January 2009, preserving the automotive industry against a severe slump, and entitled new car buyers to a €2,500 premium for their old vehicle which amounted to around €5 billion.

  28. While for EU28 a comparable increase of total public debts can be observed a much more pronounced change happened e.g. in Ireland where total public debt amounted to <45 % in 2008 and more than doubled to about 106 % in 2011.

  29. In 2012, the German unemployment rate was the lowest since reunification at 6.8 %.

  30. For the relevance of top-wealth households on the distribution of net worth using the HFCS see Vermeulen (2014).

  31. The income and expenditure survey (EVS) of the Federal Statistical Office also only collect wealth information in 5 year intervals, the last two surveys took place in 2008 and 2013. Again no relevant changes can be found. In contrast the US panel study of income dynamics (PSID) collects every other year wealth information.

  32. In contrast to almost all OECD countries the German housing market contracted strongly before the Great Recession. The contraction already started in the mid 1990’s and lasted until 2009.

  33. Future research should try to disentangle how much of this increase is related to these medium term effects of the Great Recession.

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Acknowledgments

We would like to thank participants of the Annual Meeting of the Austrian Economic Association (NOeG) 30–31 May 2014 in Vienna, the conference “Crises and the distribution” 29–30. September 2014 in Berlin, the 4. SEEK-conference (Public Finance and Income Distribution in Europe) 15–16 May 2014 in Mannheim and two anonymous referees for their helpful comments and suggestions. The author acknowledge financial support from the Hans-Böckler Foundation (project number S-2012-610-4) and finally Christian Westermeier for his assistance.

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    Markus M. Grabka

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Grabka, M.M. Income and wealth inequality after the financial crisis: the case of Germany. Empirica 42, 371–390 (2015). https://doi.org/10.1007/s10663-015-9280-8

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