Unification and the Policy Predicament in Germany

Andrew Hughes Hallett, Yue Ma and Jacques Melitz

No 956, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: F15 F20 O40 (search for similar items in EconPapers)
Date: 1994-05
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Unification and the policy predicament in Germany (1996)
Working Paper: Unification and the Policy Predicament in Gemany (1995)
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