The Caring Hand that Cripples: The East German Labor Market After Reunification (Detailed Version)

Dennis Snower and Christian Merkl

No 2066, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 labor cost (normalized by productivity) since the beginning of the nineties did not help to kick start the East. We suggest that labor force participants fell into "traps," concerning low skills, ageing of the workforce, labor-saving capital and skills, capital underutilization, and unemployment arising from the decline of the tradable sector.

Keywords: German unification; labor markets; labor market traps (search for similar items in EconPapers)
JEL-codes: E24 J3 P2 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2006-04
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (60)

Published - short version published in: American Economic Review, 2006, 96 (2), 375-382

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Related works:
Working Paper: The caring hand that cripples: The East German labor market after reunification (detailed version) (2006)
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