WAGE EFFECTS OF THE MOVE TOWARD FREE MARKETS IN EAST-GERMANY

This analysis of data from the German Socio-Economic Panel (SOEP) for the years 1989-91 illuminates important changes in the structure of wa ges that were occurring in the former East Germany during its transiti on toward a capitalist economy and changes that are probably occurring in other countries in Eastern Europe as well. Under the new capitalis t wage regime, workers realized significant returns to schooling gaine d under socialism, but no significant returns to work experience. Beca use work experience is the largest element in the human capital of old er workers, their wages fell under the new system; and the results sug gest that their wages will continue to fall relative to those of young er workers. Generous transfer payments from western Germany may preven t an absolute decline in living standards of these workers. Older work ers in other eastern countries, however, will have no such social assi stance, and their living standards will probably fall.