When capitalism takes over socialism: (Missing) Capital and East-West-German income inequality

Authors: Theresa Neef, Stefan Bach and Charlotte Bartels (both DIW Berlin)

Abstract

Thirty years after the German reunification, differences in income, wealth and living standards between East and West German households persist. Economic convergence is slowing down, while resentment and extreme voting behaviour are on the rise. In recent years, a critical debate about the adequacy of policies accompanying the German reunification has rekindled. This paper explores the reasons behind the persisting income differences by constructing Distributional National Accounts (DINA) for East and West Germany. We use the universe of individual income taxpayers, complement it with information on non-filers recorded in SOEP survey data and align incomes with National Accounts aggregates. This allows us to study the distribution of pre-tax income since 1990. We find that East German residents are still underrepresented at the top of the national income distribution and relate this finding to a lack of capital ownership among East Germans.