Working Paper: CEPR ID: DP956
Authors: Andrew Hughes Hallett; Yue Ma; Jacques Melitz
Abstract: We argue that wages have increased so far ahead of labour productivity in East Germany as to produce a problem that will continue to hound German policy-makers for the next two decades. Despite rapid rates of capital accumulation (around 9%) and growth (around 5%) in East Germany over the coming ten years, our estimates show that even if wage catch-up decelerates greatly, as long as it continues, the rate of unemployment in the East will still be twice as high as in the West in another ten years. Alternatively, if wage discipline forces the Eastern unemployment rate to come down to the Western level, wage differentials will widen substantially over these next ten years. Thus serious problems loom ahead.
Keywords: German unification; regional convergence; wage subsidies
JEL Codes: F15; F20; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wage increases in East Germany (J39) | higher unemployment rates (J64) |
| Wage restraint (E64) | widening wage gap between East and West (J31) |
| Wage increases in East Germany (J39) | persistent unemployment problem (J64) |
| Wage catch-up continues (J31) | unemployment rate in the East will remain twice that of the West by 2003 (J69) |
| Wage discipline imposed (J38) | align Eastern unemployment with Western levels (J68) |