Working Paper: CEPR ID: DP14197
Authors: Tommaso Porzio; Sebastian Heise
Abstract: We develop a job ladder model with labor reallocation across firms and regions, and estimate it on matched employer-employee data to study the large and persistent real wage gap between East and West Germany. We find that the wage gap is mostly due to firms paying higher wages per efficiency unit in West Germany and quantify a rich set of frictions preventing worker reallocation across space and across firms. We find that three spatial barriers impede East Germans’ ability to migrate West: migration costs, their preference to live in the East, and fewer job opportunities received from the West. The estimated model highlights that the spatial barriers needed to generate the large wage gap between East and West are small relative to the frictions preventing the reallocation of labor across firms. Therefore, policies that directly promote regional integration lead to smaller aggregate benefits than equally costly hiring subsidies within region.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage gap between East and West Germany (J31) | higher wages per efficiency unit in the West (J31) |
| migration costs (F22) | wage gap between East and West Germany (J31) |
| preference for remaining in the East (R23) | wage gap between East and West Germany (J31) |
| fewer job opportunities in the West (J68) | wage gap between East and West Germany (J31) |
| elimination of migration costs (F16) | minimal increase in aggregate GDP and wages (F62) |
| policies promoting regional integration (F15) | smaller benefits compared to hiring subsidies (J32) |