Divergence in Labour Force Growth in Open Economies: Should Wages and Prices Grow Faster in Germany?

Thomas Beissinger (), Joël Hellier () and Martyna Marczak ()
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Thomas Beissinger: Universität Hohenheim = University of Hohenheim, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics
Joël Hellier: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - ULCO - Université du Littoral Côte d'Opale - Université de Lille - CNRS - Centre National de la Recherche Scientifique, LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université
Martyna Marczak: Trinity College Dublin

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Abstract: We develop a model which shows that wages, prices, and the real per-capita income should grow more rapidly in open economies with low labour force growth. Otherwise, their trade partners experience rising unemployment and/or trade deficits. We apply this framework to Germany, which has exhibited modest labour force growth, except at the moment of reunification. Goods being differentiated by country of origin (Armington's hypothesis), low labour force growth limits German production and should lead to rising prices and wages relative to other countries. This mechanism is magnified by the low price elasticity of demand for German goods. Hence, German wage moderation could constrain other countries' policy options. Simulations using an extended version of the model suggest that (i) disparities in labour force growth have had a significant impact on unemployment within the Eurozone, potentially contributing to the severe economic crisis faced by Southern European countries between 2010 and 2015, and (ii) the demographic shock following reunification could explain a large part of the German economic challenges from 1995 to 2005.

Keywords: Wages; Trade; Labour force growth; Inflation; Germany (search for similar items in EconPapers)
Date: 2025-12-02
Note: View the original document on HAL open archive server: https://hal.science/hal-05627604v1
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Published in Comparative Economic Studies, 2025, 67, pp.949 - 988. ⟨10.1057/s41294-025-00266-0⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05627604

DOI: 10.1057/s41294-025-00266-0

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