Large numbers of workers enter and leave employment in industrialized market economies each month, while their unemployment stocks remain relatively constant. Eastern Germany's rate of inflow into unemployment is below that reported for the US but well above Western Germany's and also higher than in Bulgaria or the Czech and Slovak Republics. In Discussion Paper No. 800, Research Fellow Michael Burda investigates Germany's unemployment dynamics to establish if labour markets in the new Länder now function in a `Western' fashion or more closely resemble those of the other transforming economies.
Burda shows that a matching function applied to data derived from stocks of vacancies and unemployment for a sample of Western German labour office districts can explain about three-quarters of the variance of employment outflow. The estimated function is stable and exhibits constant returns to scale. A similar function for monthly gross exit data from local labour office districts in the new German states since July 1990 displays increasing returns and zero or negative coefficients on vacancies. But estimates from the Czech Republic since late 1990, which possessed a similar industrial structure to the GDR and has faced similar economic difficulties, indicate more `Western' matching behaviour.
Burda argues that this divergence may reflect generous Federal assistance to the Eastern Länder in subsidies to `short-time work', financing enterprise deficits through the Treuhand and active labour market programmes. A matching function modified to take account of such effects yields similar estimates to those of the Czech Republic. Measured improvements in matching efficiency remain robust at about 2% and 1% per month for the Czech Republic and ex-GDR respectively. Cross-sectional estimates militate against interpretations of their decreasing returns to scale based on congestion due to poor organization of labour markets, however; these may rather reflect econometric problems in estimating returns to scale on matching technology in transforming economies.

Modelling Exits from Unemployment in Eastern Germany: A Matching Function Approach
Michael C Burda

Discussion Paper No. 800, May 1993 (HR)