Wages and Worker Displacement in Germany

This paper investigates the effect of displacement on wages of socially insured German workers who became unemployed in 1986. Because detailed information on job loss is unavailable, displacement status is predicted using a probit estimated on the German Socioeconomic Panel. In contrast to US findings, post-displacement wages decline only slightly upon reemployment. The lowest earnings quartile, in which displacement is concentrated, even gains slightly (2%), while wage growth losses for the upper three quartiles are higher (-17%). Limited wage adjustment of displaced workers is likely to play an important role in explaining aggregate wage rigidity in Germany.