ifo Dresden: Differences in Economic Structure Explain Two-Thirds of the Wage Gap between Eastern and Western Germany

Two-thirds of the wage gap between eastern and western Germany can be explained by differences in economic structure. “Many people in eastern Germany work in typical low-wage industries, and large manufacturing companies that pay well are hardly represented here,” says Jannik Nauerth from the ifo Institute’s Dresden Branch. Today, 33 years after reunification, employees in Germany’s eastern states (with the exception of Berlin) earn around 15 percent less per hour on average than their colleagues in western Germany. But after accounting for structural effects, the figure is only 5 percent.

“That’s why proposals from policymakers that see extending collective bargaining coverage to more companies as a way to reduce the wage gap are of little help,” adds Joachim Ragnitz of ifo Dresden. “It remains to be seen whether the recent arrival in eastern Germany of Tesla and other big companies can close the wage gap in the long run.”

While employees in western Germany earned an average of EUR 31.40 per hour in 2022, employees in the eastern German states (except Berlin) earned only EUR 26.60 per hour. This is often used as evidence that employees in eastern Germany are at a supposed disadvantage. “But our analysis shows that about two-thirds of the wage gap can be explained by structural differences between eastern and western Germany,” Ragnitz says, continuing: “Many companies aren’t bound by collective agreements because for them the disadvantages outweigh the advantages. That’s why unions and employers should ensure that collective agreements take greater account of features particular to small companies.”