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This is how unequal German society has become

Measuring the after-tax income of German households in terms of Gini coefficients, the Friedrich Ebert Foundation released a report on Monday which showed that German income inequality reached a peak of 28.8 in 2013.

A Gini coefficient of zero represents absolute equality, while 100 represents absolute inequality.

In 1991 Germany had a Gini coefficient of 24.8. While this figure stayed relatively stable until the end of the decade, it shot up at the beginning of the millennium, increasing from 24.9 in 2000 to 28.8 in 2006.

Several recent studies have also come to the conclusion that German wages are becoming ever more unequal in recent years.

A study released by the Reconstruction Credit Institute (KfW) in March also showed how unevenly the fruits of prosperity have been divided over the past decade and a half.

Whereas in 2000 Germany had arguably the lowest income inequality in the world, it has now fallen behind the Czech Republic, Sweden and Denmark, the KfW report found.

KfW did however emphasize that Germany is still one of the most equal countries in the world when it comes to disparity in earnings, due to its progressive tax system.

A drag on the economy

The Friedrich Ebert Foundation report argues that income inequality is harmful to the German economy, estimating that if the 1991 Gini coefficient had remained constant, GDP in Germany would have been €40 billion higher in 2015.

The authors do however warn that their figures should be treated with caution as their model contains uncertainties.

According to the report, income inequality can have positive and negative effects, although the negatives outweigh the positives.

Initially the disparity in wages creates an incentive for people to work harder in order to gain access to the higher salaries. However, when disparity becomes too extreme, low earners become frustrated and lose the motivation to break through the wage ceiling.

But in both cases those on lower salaries lose purchasing power and thereby consume less, leading to falling domestic demand for goods. Those on high salaries do not spend enough to compensate for this shortfall, preferring to save some of their money instead.

The most dramatic effect that income inequality has is on human capital, according to the report, although this only becomes apparent years later. As lower income earners have less money in the bank, they spend less on their education and training, thus lowering productivity and entrenching inequality.

Article source: http://www.thelocal.de/20161128/this-is-how-unequal-german-society-has-become