The Caring Hand that Cripples: The East German Labour Market after Reunification

Dennis Snower and Christian Merkl

No 5656, CEPR Discussion Papers from Centre for Economic Policy Research

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 labour cost (normalized by productivity) since the beginning of the 1990s did not help to kick start the East. We suggest that labor force participants fell into 'traps,' concerning low skills, ageing of the workforce, labour-saving capital and skills, capital underutilization, and unemployment arising from the decline of the tradeable sector.

Keywords: German unification; Labour markets; Labour market traps (search for similar items in EconPapers)
JEL-codes: E24 J3 P2 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-ltv and nep-mac
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Citations: View citations in EconPapers (33)

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