Socio-Economic Review, Vol. 16, Issue 3, pp. 499–522, 2018

Mercantilist Dualization: The Introduction of the Euro, Redistribution of Industry Rents, and Wage Inequality in Germany, 1993–2008

The current debate over distributional implications of the crisis-ridden Economic and Monetary Union (EMU) is heavily biased toward inter-national accounts. Little attention is paid to who wins and who loses out intra-nationally. I argue that in Germany the EMU has reinforced dualization, the insider–outsider cleavage in the country’s welfare state and production model. To scrutinize this argument, I analyze longitudinal linked employer–employee data (N > 9.6 mio) and pursue a mechanistic three-step identification strategy: first, I illustrate how the introduction of the euro distorted real interest and exchange rates within the eurozone. Second, I demonstrate how these imbalances redistributed rents from the domestic sector, in particular from construction, to the core manufacturing industry. Third, I show how this shift in industry rents reverberated to the wage distribution and increased inequality. The study contributes to resolve the puzzle why wage inequality in Germany increased through a fanning out of the wage distribution whereas countries similarly exposed to technological change and globalization grew unequal through a polarization of their wage distribution.