A review of trends in education and wage development
Germany faced a constant increase in educational attainment. The first panel of Fig. 1 shows the distribution of the four education levels for young workers over time. The number of young workers without any vocational qualification has decreased considerably – from about one quarter in 1975 to about one tenth in 2010. Obviously, workers with vocational training (medium-skilled) are the backbone covering more than two thirds of the young labor force over the whole time span. The share of medium-skilled workers had grown until the mid-1990s at the expense of low skills. Its share has declined from then onwards at the expense of higher education. The share of young workers with higher education had doubled from the mid-1970s to the mid-1990s – but was still of smaller importance by the mid-1990s with 14% of the working population only. The growth of the share of high-skilled workers has gained pace thereafter, notably for high-uni-skilled workers. By 2010, more than one quarter of the young workforce has completed higher education; and the share high-uni-skilled workers has been larger than the share of workers without vocational training.
This impression fully reverses, however, when regarding the absolute numbers displayed in the second panel. The proportional shift observed for shares of education attainment is not present anymore. Although the share of high-skilled workers increased over time and doubled from 1995 to 2010, the absolute number has remained nearly constant. Beginning in the 1990s, the effects of demographic change in Germany have induced a sharp decrease in the number of young persons.Footnote 1 The number of 25-year-old persons had decreased from 1990 to 1999 by more than one third and has maintained this level during the 2000s (East and West Germany combined).Footnote 2 Due to that, even though the relative number of high-skilled workers has increased continually, it is important to note that the absolute number has hardly changed.
How did these shifts of the skill distribution affect the wage structure? Fig. 2 displays the development of log median daily wages separately for experienced workers between 36 and 60 years and for younger workers (25 to 35 years of age) with a further distinction by the four education groups. For the whole groups, the median real wage had increased monotonously from 1975 to 1990 – with a short episode of negative growth between 1980 and 1982. A volatile but more or less stable development of wages characterizes the development during the 1990s. After 2003, real wages have started to decrease for all workers but more considerably for the group of young workers. More importantly, the figure indicates that the wages of experienced workers and that of young workers have started to diverge over time. In the beginning of the sample period, the wage gap between young and experienced workers was merely 3%. It has increased to 16% until 2010. The growing wage gap has occurred in two periods, namely until 1990, and after the year 2002/2003, coinciding with the tech bust and the implementation of the ‘Agenda 2010’ labor market reforms in 2003. This evidence may be interpreted as a rise in wage inequality, notably for the young (and) labor market entrants, see e. g. Gernandt and Pfeiffer (2007), Antonczyk et al. (2010) or Eichhorst and Tobsch (2015).
Consideration of the four education groups shows some heterogeneity between groups. While the overall trends in the development can be seen – more or less – for all groups, the gaps between wages of experienced and young workers are clearly larger for the two high-skilled groups. On the other hand, the widening of the within-education-group wage gap is less emphasized for those groups over the 36 years of analysis. Since the turn of the century, however, the stronger decrease of median wages of the young compared to the experienced has nevertheless imposed more inequality.Footnote 3 The trends of median wages of the medium-skilled, who are the largest group (see above), are similar to the overall picture. Vice versa, the divergence between experienced and younger workers’ wages is stronger than in the two high-skilled groups. Finally, for the low-skilled, wages have risen more or less steadily from 1975 to around 1990, and have started to decrease slightly and monotonously thereafter. Also for this group, the decrease of median wages has been a bit stronger for the young than the experienced, which contributes to a widening wage gap pattern.
There is some literature analyzing the relationship between education attainment and wages with particular focus on the role of cohort size (e. g. Freeman 1979; Welsh 1979; Berger 1983; Fertig and Schmidt 2004; Morin 2015; Moffat and Roth 2016). The key assumption of the studies is that workers of different ages or experiences are only imperfectly substitutable; therefore, an increase in the size of a specific experience-education group will mainly affect the wages of workers in this group. Empirical evidence in favor of this hypothesis is given by, e. g. Freeman (1979), Wright (1991) or Morin (2015) besides others. However, for Germany the effects may be less clear due to opposing effects of wage rigidities and the bargaining process between employer associations and unions as noted by Fertig and Schmidt (2004). While changes in cohort size may result in education-experience specific unemployment in face of rigid wages, larger cohorts may possess a greater bargaining power, which mitigates the expected negative effect of cohort size. The decreasing level of collective pay agreements in the German economy overall and particularly for higher-skilled workers over the years of analysis may therefore point towards lower wages due to larger relative cohorts.
Are there declining fortunes of the young in Germany?
The task composition of young workers
While the workforce has become more skilled due to the increasing share of high-skilled workers, the average employment share of non-routine analytical tasks has remained largely stable. This can imply some kind of occupational downgrading for high-skilled workers. A possible reason would be a shrinking average task share of non-routine analytical tasks in that group. Therefore, we decompose the average task performance by education groups to reveal a potential shift of high-skilled workers to jobs that do not require their expected analytical skills.Footnote 4
Fig. 3 displays these shifts in the performed tasks. The average employment share in analytical jobs sorts according to education attainment. Expectedly, it is highest for employees with a university degree and lowest for persons without vocational training. Overall, the average shares show a high persistence but there had been a small decline for high-skilled workers until 1985. For the high-fh-skilled workers, we further observe a decrease after 2000. However, the share of non-routine analytical tasks for each education group has maintained a rather stable level over time, which can be interpreted as an equilibrium between the increasing demand for analytical tasks and the educational expansion in Germany. This is in line with findings of Beaudry and Green (2003).
The non-routine interactive employment share (that has slightly increased for the young workforce overall) has decreased for high-uni-skilled until the mid-1990. For the high-fh-skilled workers, it has remained stable after 1990. Contrary to that, routine cognitive tasks have become more important for high-skilled workers until 1997. After that year, however, their fraction in the task composition has begun to fall slowly. For the high-fh-skilled, the share has risen similarly until the mid-1990s, and has maintained that level more or less since then. For high-skilled workers, routine manual and non-routine tasks have played a minor role only over the whole period of analysis.
To summarize, the empirical figures indicate that the share of high-skilled workers performing non-routine analytical jobs has remained rather constant for long periods, but there is some heterogeneity between high-uni-skilled and high-fh-skilled employees. The increase of high-skilled workers in routine cognitive jobs may hint at an academization of these jobs. For the high-uni-skilled, the share of routine cognitive tasks has increased continuously at the expense of non-routine interactive tasks, whereas the remaining task shares have remained on rather constant levels over time. For the high-fh-skilled, the share of routine cognitive tasks has increased similarly at the expense of two groups: on the one hand, the shares of non-routine analytical tasks before 1985 and after 2003 have decreased, and on the other hand, non-routine interactive tasks had decreased between 1987 and 1992. Overall, besides these tendencies, a clear cascading pattern – as described in Beaudry et al. (2014) – cannot be confirmed for the two groups of high-skilled workers in Germany since the pattern of the task composition is too persistent to provide unambiguous indications for declining labor market chances of the young.
Development of young workers in top-paying jobs
Do high-skilled labor market entrants receive the best-paying jobs? To answer this question, we order jobs according to their average wage in all years.Footnote 5 We distinguish between three job categories: top-paying jobs pay above the 70th wage percentile, bottom-paying jobs below the 30th wage percentile; all others are medium-paying jobs.Footnote 6 Fig. 4 plots the developments and shares of labor market entrants with four to six years of potential experience in the three job categories over time and takes the different levels of education into account. Since the first cohorts in consideration entered the labor market in 1975, the plots of experienced employees start in 1980. Due to data restrictions for some groups (small number of observations), some plots have to start in the mid-1980s. The first panel shows that, overall, the share of young workers employed in top-paying occupations after four to six years of experience had risen from 14% (1980) to 21% (1998), but has stagnated thereafter. Moreover, the main rise has occurred during the 1990s. At the same time, the fraction of workers in the bottom-paying jobs has remained largely constant over the full observation period with a small increase after 2003. Hence, these patterns imply that the shift towards more workers in top-paying occupations reflects a declining share of workers in medium-paying jobs.
To get a more detailed picture, distinguishing between education attainments can further reveal the adverse opportunities for high-skilled workers in recent years. As becomes obvious from the pattern, university graduates have faced a decreasing chance of working in top-paying jobs. The fraction declined from 81% (1985) to 72% (2010). A major part of this drop has occurred after the year 2000 and notably in support of medium-paying jobs. The shift is even more profound for high-fh-skilled workers, who have faced a drastic drop in top-paying jobs from 72 to 58% between 2000 and 2010 in favor of medium-paying jobs. In line with this, the picture for medium-skilled workers shows that the chance of obtaining a medium-paying job has slightly fallen after the year 2000, concurrently with an increasing share in bottom-paying jobs. A similar pattern can also be derived for low-skilled workers. Their chances of obtaining a medium-paying job have constantly fallen, especially after 1995, and the risk of obtaining a bottom-paying job has increased and has surpassed the share of medium-paying jobs by 2010.
Hence, with respect to job quality we find a clear cascading pattern across skill groups after 2000, which may hint at an oversupply of high-skilled workers (since skills have grown over time, see above). Although the share of all young workers in top-paying jobs has remained relatively stable over the 2000s (after an increase over the 1990s), for the groups of high-skilled workers there have been clear declines in the respective shares. This means that less young workers have obtained a top-paying job after 2000. On the contrary, their share in medium-paying jobs has risen continuously. Concurrently with that, the share of medium- and low-paying workers in medium-paying jobs has shrunk, while – vice versa – their share in bottom-paying jobs has increased. These patterns clearly indicate that relatively better skilled groups have crowded out relatively lower skilled groups in Germany – at least over the first decade of this century.
Wage growth and entry wages over time
The empirical results just presented document a cascading pattern across skill groups since the year 2000 in Germany. At the same time, the level of skills, and in particular the share of high-skilled young workers overall, have increased tremendously. This translates into a rather stable job ordering for all young workers (top left panel in Fig. 4). Fig. 2 above displayed that the increasing wage gap between the young and the experienced workers has widened notably after 2003. The stable shares in top-, medium- and low-paying jobs and the contemporaneously rising wage gap from 2003 onwards can therefore only be reconciled with declining wages within jobs or falling skill premia. Wages and wage growth must have fallen over time for young workers – independently of their skills.
Fig. 5 provides empirical evidence on this development.Footnote 7 It shows how job entrants have performed in their first five years of work with consideration of education attainment and potential experience.Footnote 8 Each line refers to two consecutive annual entry cohorts. As becomes obvious, starting wages and wages after five years have both tended to increase until the year 2000. After that year, however, entry wages have started to fall. Moreover, wage growth slowed down considerably (indicated by the shorter and less steep wage profiles), resulting in lower wages after five years of work. These are quite important findings for understanding the changing situation for labor market entrants in Germany.
Looking at the changes around the turn of the century in more detail, the initial five-year wage growth declined for high-uni-skilled workers from about 28% (1996/97-cohort) to 19% (2002/03-cohort). Over the same period, newly arriving cohorts of high-fh-skilled workers experienced an even stronger reduction from 32 to 14%. All other groups suffered from quite substantial declines of wage growth, too; from about 20 to 10% for medium-skilled and from about 24 to 19% for low-skilled workers. Hence, the moderation of wage growth affected all skill groups.
However, by consideration of the long-run development the picture indicates some kind of cyclicality in wage growth for high-skilled workers: wage growth and entry wages increased for cohorts entering the labor market after the mid-1980s. This changed by declining wage growth and entry wages in the early 1990s. About a decade later, this pattern repeated with increasing wage growth from the mid-1990s and falling wage growth from the early 2000s. In contrast to these patterns for the high-skilled, entry wages and wage growth for low-skilled workers have already started to fall from the early 1990s onwards, and wage growth for medium-skilled workers has shrunk continuously from the 2000s.
This cyclicality in wages and wage growth, promptly accelerating for cohorts entering the labor market in the mid-1990s and recapturing its former path after the millennium, still cannot completely explain the increasing wage gap between young and experienced workers (see Fig. 2 above). The cyclicality can be observed for both high-uni and high-fh-skilled workers, and there is no convergence to narrowing the wage gap between young and experienced workers in the late 1990s. At the same time and in contrast to the higher-skilled groups, there is no clear cyclical movement for medium- and low-skilled workers: medium-skilled young workers had faced constant wages and wage growth in the 1990s, which have declined after the millennium. For low-skilled workers, the corresponding fall in wages has begun already a decade earlier. Both developments are easy to reconcile with falling chances to obtain medium-paying jobs and increasing risks to get bottom-paying jobs as well as the cascading pattern across skill groups, starting by the millennium for medium-skilled workers and about a decade earlier for low-skilled workers. Still, the increasing wage gap between young and experienced workers is difficult to explain in light of the increasing share of high-skilled workers and the declining share of medium-skilled and low-skilled workers. Hence, a further possible reason for the wage gap remains in a decline of wage premia for skills, i. e. lower returns to education levels over time.Footnote 9
Wage premia
Having discussed aspects of education, jobs and wages, we will consider the development of returns to education (wage premia) over time as the final step in analyzing the chances of job market entrants. Declining opportunities of young high-skilled workers getting a high-paying job can also result in lower wage premia for higher degrees. However, since wage premia are the returns relative to other education groups, the evolution of (entry) wages of those groups is of particular importance. If (entry) wages of the other groups have decreased even more strongly, than wage premia for high-skilled workers could increase independently of the overall development of wages of that group. We estimate a variant of the Mincer earnings equation that considers the effect of potential experience, education level (categorical) and gender (dummy). We augment the model in a second step by dummy variables for tasks (reference category: non-routine manual jobs).Footnote 10 To analyze wage premia over time, we estimate the models for each year separately.
Fig. 6 plots the estimated coefficients of wage premia to education levels over time, both with and without controlling for tasks (left and right panel). Wage premia have continually increased from the mid-1990s for high-skilled individuals. The wage premium for the medium-skilled, however, has increased only slightly. The wage gap between medium-skilled and high-skilled workers, therefore, has widened over time. Higher education, independently of having a degree from a university or from a university of applied sciences was thus associated with an increasing wage premium relative to low and medium education. Nevertheless, the gaps in the wage premia between the different groups of higher education have remained rather persistent over the whole analysis period.
When task groups are considered in the estimation, they reduce the absolute level and the relative increase of the estimated wage premia of high-skilled workers. Despite this level effect, the relative increase of wage premia has followed a similar pattern. For high-skilled workers, wage premia have increased after the mid-1990s, but the rise has been smaller in size. However, the increase in the wage premium of medium-skilled workers relative to low-skilled workers has halved when taking the effects of tasks into account. Both panels show the increase in wage premia relative to low-skilled and medium-skilled workers. Figs. 4 and 5 above revealed already a decline of starting wages for low-skilled workers. The increase in wage premia of high-skilled workers may thus further imply a relative fall of demand and of wages for low-skilled workers. With respect to the timing, it should be noted that most of the increase of the wage premia has occurred after the mid-1990s. From the beginning of the 2000s, however, real wages of high-skilled labor market entrants have fallen, but not as strong as those of low-skilled and medium-skilled workers.