Working Paper: CEPR ID: DP730
Authors: David Begg; Richard Portes
Abstract: In Spring 1991, we argued that the centrepiece of German policy towards unification should be a universal, temporary wage subsidy in Eastern Germany and the elimination of all other subsidies. Subsequent events have strengthened the analytical case for and practical importance of this policy. This paper describes the performance of the Eastern German economy since unification, the reasons behind it, and the principal policy responses. It then identifies the specific market failures attributable to unification and shows that the various current policy interventions are poorly targeted. Finally, the paper sets out our proposal, explains why it minimizes distortions, and deals with common objections to a wage subsidy.
Keywords: Germany; Wage Subsidies; Migration; Labour Mobility
JEL Codes: J30; J61; 052
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high-wage policy (J38) | significant unemployment (J64) |
| high-wage policy (J38) | inefficiencies in the labor market (J49) |
| wage subsidy (J38) | stimulate employment (J68) |
| high-wage policy (J38) | impeded Treuhandanstalt in restructuring state-owned enterprises (P31) |
| high-wage policy (J38) | suboptimal outcomes in terms of employment and investment (J68) |
| current ad hoc policies (E60) | exacerbate market failures (D47) |
| wage subsidy (J38) | minimize distortions (H21) |
| wage subsidy (J38) | address identified market failures (D47) |