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

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 USA – about the consequences of the financial crisis on income inequality in Europe and more important about wealth inequality. 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 recession in 2008-09. 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 recession 2008-09. However, the 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 recession. Several factors attenuated the impact of the recession and will be discussed in detail.