DP956 Unification and the Policy Predicament in Germany

Author(s): Andrew Hughes Hallett, Yue Ma, Jacques Melitz
Publication Date: May 1994
Keyword(s): German Unification, Regional Convergence, Wage Subsidies
JEL(s): F15, F20, O40
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=956

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.