Working Paper: CEPR ID: DP5656
Authors: Dennis J. Snower; Christian Merkl
Abstract: The East German labor market has hardly made any progress since German reunification, despite massive migration flows and support from the West. We argue that East Germany is in trouble precisely because of the support it has received. This paper explores the phenomenon of 'the caring hand that cripples,' arising from bargaining by proxy, the adoption of the West German welfare system and the associated employment persistence. Even the steady decrease of labour cost (normalized by productivity) since the beginning of the 1990s did not help to kick start the East. We suggest that labor force participants fell into 'traps,' concerning low skills, ageing of the workforce, labour-saving capital and skills, capital underutilization, and unemployment arising from the decline of the tradeable sector.
Keywords: German unification; Labour market traps; Labour markets
JEL Codes: E24; J3; P2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Support from West Germany (F55) | Wage increases in East Germany (J39) |
| Wage increases in East Germany (J39) | Persistent unemployment (J64) |
| Support from West Germany (F55) | Bargaining by proxy (C78) |
| Bargaining by proxy (C78) | Wage increases in East Germany (J39) |
| Generous unemployment benefits and job security provisions (J65) | High wages in East Germany (J39) |
| High wages in East Germany (J39) | Persistent unemployment (J64) |
| Support from West Germany (F55) | Labor market traps (J48) |
| Labor market traps (J48) | Persistent unemployment (J64) |
| Support from West Germany (F55) | Low skill traps (J24) |
| Support from West Germany (F55) | Aging workforce (J26) |
| Support from West Germany (F55) | Labor-saving traps (D13) |
| Support from West Germany (F55) | Non-tradable sector trap (F16) |