Earnings Inequality and Working Hours Mismatch

Using data from the German Socio-Economic Panel, we show that changes in working hours, not changes in wages, are the major driver of rising earnings inequalities in Germany since the early 1990s. Next, we analyze whether changes in working hours are in line with employee preferences by comparing mismatches between desired and actual hours. We find that underemployment among low-wage earners increased, pointing at involuntary part-time work as a source of earnings inequality. In addition, for females, the presence of children in the household is associated with underemployment. Simultaneously, the desire for a reduction of working hours is more pronounced at the upper part of the hourly wage distribution. A counterfactual earnings distribution based on desired working hours and actual hourly wages exhibits significantly less inequality than the actual earnings distribution.