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Escaping the unemployment trap: The case of East Germany

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  • Merkl, Christian
  • Snower, Dennis J.

Abstract

This paper addresses the question of why high unemployment rates tend to persist even after their proximate causes have been reversed (e.g., after wages relative to productivity have fallen). We suggest that the longer people are unemployed, the greater is their cumulative likelihood of falling into a low-productivity "trap," through the attrition of skills and work habits. We develop a model along these lines, which allows us to bridge the gap between high macroeconomic employment persistence versus relatively high microeconomic labor market flow numbers. We calibrate the model for East Germany and examine the effectiveness of three employment policies in this context: (i) a weakening of workers' position in wage negotiations due to a drop in the replacement rate or firing costs, leading to a fall in wages, (ii) hiring subsidies, and (iii) training subsidies. We show that the employment effects of these policies depend crucially on whether low-productivity traps are present. Journal of Comparative Economics 36 (4) (2008) 542-556.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 36 (2008)
Issue (Month): 4 (December)
Pages: 542-556

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Handle: RePEc:eee:jcecon:v:36:y:2008:i:4:p:542-556

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Web page: http://www.elsevier.com/locate/inca/622864

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Keywords: Labor market Labor market trap East Germany Unemployment;

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References

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Citations

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Cited by:
  1. Dennis J. Snower & Alessio J. G. Brown & Christian Merkl, 2009. "Globalization and the Welfare State: A Review of Hans-Werner Sinn's Can Germany Be Saved?," Journal of Economic Literature, American Economic Association, vol. 47(1), pages 136-58, March.
  2. Hermann Gartner & Christian Merkl & Thomas Rothe, 2009. "They Are Even Larger! More (on) Puzzling Labor Market Volatilities," Kiel Working Papers 1545, Kiel Institute for the World Economy.
  3. Yvonne Schindele, 2010. "How Long Does it Take to Become an Entrepreneurial Society - The Case of German Convergence in Self-Employment," Jena Economic Research Papers 2010-015, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  4. Juan Carlos Martinez Oliva, 2009. "Riunificazione intertedesca e politiche per la convergenza," Mo.Fi.R. Working Papers 14, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

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