55th Congress of the European Regional Science Association: "World Renaissance: Changing roles for people and places", 25-28 August 2015, Lisbon, Portugal
We demonstrate that almost one half of the observed wage gap between East and West Germany reflects differences in worker, establishment, and regional characteristics rather than differences in productivity at the establishment level. Regional price and establishment size differentials alone account for one quarter of the overall East-West wage gap. Differences in employees? characteristics and in productivity deliver much smaller but still statistically significant contributions. We derive these results from an Oaxaca-Blinder decomposition using unusually rich linked employer-employee data. Our findings are quite stable over the period from 1996 to 2010 and over the wage distribution.