Immigration and Wage Dynamics in Germany

IMF Working Papers, December 27, 2019

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German wages have not increased very rapidly in the last decade despite strong employment growth and a 5 percentage point decline in the unemployment rate.
A large part of the decline in unemployment was structural.
Micro-founded Phillips curves fit the German data rather well.
Relatively low wage growth can be largely attributed to low inflation expectations and low productivity growth.
There is no evidence—from either aggregate or micro-level administrative data—that large immigration flows since 2012 have had dampening effects on aggregate wage growth, as complementarity effects offset composition and competition effects.

Wage dynamics:
- Slow nominal wage increases over the last decade, despite strong employment growth.
- Low inflation expectations and low productivity growth are identified as primary contributors to low wage growth.
Unemployment and labor market structure:
- Unemployment declined by 5 percentage points over the period discussed.
- A large part of this unemployment decline is structural rather than cyclical.
Immigration effects:
- Large immigration flows since 2012 did not dampen aggregate wage growth.
- Complementarity effects from immigration offset composition and competition effects.
Model performance:
- Micro-founded Phillips curves provide a good fit to German data.

Evidence drawn from both aggregate data and micro-level administrative data.
Analytical approach includes micro-founded Phillips curve estimation.
Use of panel regression techniques and micro-data (keywords indicate WLS panel wage equation, wage Phillips curve, reservation wage considerations).

Low wage growth is linked to low inflation expectations and low productivity growth rather than to immigration-driven labor supply pressures.
Structural improvements in labor market participation and employment underlie a substantial share of the unemployment decline.
Immigration since 2012 appears to have neutral net effects on aggregate wages due to offsetting labor-market mechanisms (complementarity vs. composition and competition).