Dynamics in transitory and permanent variation of wages in Germany

► We decompose cross-sectional wage variance into permanent and transitory parts. ► Using German micro panel data (SOEP), we compare results for a balanced and an unbalanced panel. ► The permanent fraction of wage inequality in Germany increases continuously from 1994 until 2001, then falls and recovers again. ► Interestingly, the drop in permanent inequality occurs at times of most rapid increases in cross-sectional inequality. ► It is to a large extent the temporary component that drove expansion of cross-sectional wage inequality during the early 2000s.