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Eastern Germany since unification: wage subsidies remain a better way

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  • David Begg
  • Richard Portes

Abstract

In Spring 1991, we argued that the centrepiece of German policy towards unification should be a universal, temporary wage subsidy in Eastern Germany and the elimination of all other subsidies. Subsequent events have strengthened the analytical case for and practical importance of this policy. This paper describes the performance of the Eastern German economy since unification, the reasons behind it, and the principal policy responses. It then identifies the specific market failures attributable to unification and shows that the various current policy interventions are poorly targeted. Finally, the paper sets out our proposal, explains why it minimizes distortions, and deals with common objections to a wage subsidy.
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Suggested Citation

  • David Begg & Richard Portes, 1993. "Eastern Germany since unification: wage subsidies remain a better way," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 1(4), pages 383-400, December.
    • Handle: RePEc:bla:etrans:v:1:y:1993:i:4:p:383-400
    DOI: 10.1111/j.1468-0351.1993.tb00092.x
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    1. Franz, Wolfgang, 1991. "German labour markets after unification," Discussion Papers, Series II 162, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    2. Neumann, Manfred J.M., 1991. "German Unification: Economic Problems and Consequences," CEPR Discussion Papers 584, C.E.P.R. Discussion Papers.
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    5. Burda, Michael C & Wyplosz, Charles, 1991. "Labour Mobility and German Integration: Some Vignettes," CEPR Discussion Papers 615, C.E.P.R. Discussion Papers.
    6. Siebert, Horst, 1991. "German unification: the economics of transition," Kiel Working Papers 468, Kiel Institute for the World Economy (IfW Kiel).
    7. Burda, Michael C & Funke, Michael, 1992. "Trade Unions, Wages and Structural Adjustment in the New German States," CEPR Discussion Papers 652, C.E.P.R. Discussion Papers.
    8. Dani Rodrik, 1994. "Foreign Trade in Eastern Europe's Transition: Early Results," NBER Chapters, in: The Transition in Eastern Europe, Volume 2, Restructuring, pages 319-356, National Bureau of Economic Research, Inc.
    9. Hans-Werner Sinn, 1991. "Macroeconomic Aspects of German Unification," NBER Working Papers 3596, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Barbara Dluhosch & Daniel Horgos, 2008. "Wage vs. industry subsidies: coping with technology related unemployment in a globalized economy," International Economics and Economic Policy, Springer, vol. 5(4), pages 371-388, December.
    2. Agnès Bénassy-Quéré & Pierre Villa, 1994. "La réunification allemande du point de vue de la politique économique," Working Papers 1994-09, CEPII research center.
    3. Giovanni Trovato & Marco Alfó, 2006. "Credit rationing and the financial structure of Italian small and medium enterprises," Journal of Applied Economics, Universidad del CEMA, vol. 9, pages 167-184, May.
    4. Fuest, Clemens & Huber, Bernd, 2000. "Why do governments subsidise investment and not employment?," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 171-192, October.
    5. Hunt, Jennifer, 1999. "Determinants of Non-Employment and Unemployment Durations in East Germany," CEPR Discussion Papers 2182, C.E.P.R. Discussion Papers.
    6. Venetoklis, Takis & Kangasharju, Aki, 2002. "Business Subsidies and Employment of Firms: Overall Evaluation and Regional Extension," Discussion Papers 268, VATT Institute for Economic Research.
    7. Jennifer Hunt, 2002. "The Transition in East Germany: When Is a Ten-Point Fall in the Gender Wage Gap Bad News?," Journal of Labor Economics, University of Chicago Press, vol. 20(1), pages 148-169, January.
    8. Schmidt, Klaus-Dieter, 1996. "German unification: A progress report," Kiel Working Papers 722, Kiel Institute for the World Economy (IfW Kiel).
    9. Harrigan, Frank & McGregor, Peter G & Swales, J K, 1996. "The System-Wide Impact on the Recipient Region of a Regional Labour Subsidy," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 105-133, January.
    10. Henning Klodt, 2000. "Industrial Policy and the East German Productivity Puzzle," German Economic Review, Verein für Socialpolitik, vol. 1(3), pages 315-333, August.
    11. Gerling, Katja, 1998. "Transfers and transition: The impact of government support on factor demand and production in Eastern Germany," Kiel Working Papers 878, Kiel Institute for the World Economy (IfW Kiel).
    12. Jennifer Hunt, 2001. "Post-Unification Wage Growth in East Germany," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 190-195, February.
    13. Page, William, 2003. "Germany's Mezzogiorno revisited: Institutions, fiscal transfers and regional convergence," Research Notes 9, Deutsche Bank Research.
    14. Klodt, Henning, 1996. "West-Ost-Transfers und Strukturprobleme in den neuen Ländern," Open Access Publications from Kiel Institute for the World Economy 1677, Kiel Institute for the World Economy (IfW Kiel).
    15. Michael C. Burda & Jennifer Hunt, 2001. "From Reunification to Economic Integration: Productivity and the Labor Market in Eastern Germany," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2), pages 1-92.
    16. Karp, Larry & Paul, Thierry, 2000. "Unemployment and the 'Labour-Management Conspiracy.'," Economic Journal, Royal Economic Society, vol. 110(460), pages 113-135, January.
    17. Kangasharju, Aki & Venetoklis, Takis, 2002. "Effect of business subsidies on labour demand: overall evaluation with regional extensions," ERSA conference papers ersa02p172, European Regional Science Association.
    18. Hughes Hallett, A. & Ma, Y. & Melitz, J., 1996. "Unification and the policy predicament in Germany," Economic Modelling, Elsevier, vol. 13(4), pages 519-544, October.
    19. Karp, Larry & Paul, Thierry, 1998. "Labor adjustment and gradual reform: when is commitment important?," Journal of International Economics, Elsevier, vol. 46(2), pages 333-362, December.
    20. Karp, Larry & Paul, Thierry, 1994. "Labor Adjustment and Gradual Reform:Is Commitment Important?," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7gc7t3nm, Department of Agricultural & Resource Economics, UC Berkeley.
    21. Klodt, Henning, 1999. "Industrial policy and the East German productivity puzzle," Kiel Working Papers 943, Kiel Institute for the World Economy (IfW Kiel).
    22. Clemens Fuest & Bernd Huber, 1998. "Why Do Countries Subsidize Investment and Not Employment?," NBER Working Papers 6685, National Bureau of Economic Research, Inc.
    23. Karp, Larry S. & Stefanou, Spiro E., 1995. "Prospects and Policy for Central and East European Agriculture," CUDARE Working Papers 6179, University of California, Berkeley, Department of Agricultural and Resource Economics.

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    More about this item

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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