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Wage Adjustment, Competitiveness and Unemployment – East Germany after Unification

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  • Werner Smolny

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    (University of Ulm)

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    Abstract

    Nearly 20 years after unification large differences of the labor market situation in East and West Germany persist. Wages are still considerably lower, the unemployment rate is about twice of the West German level, and the competitiveness of the East German economy seems to be low. This paper analyzes the process of (relative) wage adjustment in East Germany and the resulting development of competitiveness and unemployment differentials. We present estimates of the wage adjustment in East vs. West Germany based on wage convergence and effects of unemployment on wage growth. The central focus of the paper is the empirical analysis of the interaction of the development of competitiveness and the labor market situation. The results reveal large equilibrium gaps for wages and unemployment which are based on the wage-setting process, the behavior of competitiveness and the adjustment of unemployment.

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    Bibliographic Info

    Article provided by Justus-Liebig University Giessen, Department of Statistics and Economics in its journal Journal of Economics and Statistics.

    Volume (Year): 229 (2009)
    Issue (Month): 2-3 (June)
    Pages: 130-145

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    Handle: RePEc:jns:jbstat:v:229:y:2009:i:2-3:p:130-145

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    Related research

    Keywords: Wages; competitiveness; unemployment; economics of transition;

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    References

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    1. Franz, Wolfgang, 2003. "Will the (German) NAIRU Please Stand up?," ZEW Discussion Papers 03-35, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    3. Boltho, Andrea & Carlin, Wendy & Scaramozzino, Pasquale, 1997. "Will East Germany Become a New Mezzogiorno?," Journal of Comparative Economics, Elsevier, vol. 24(3), pages 241-264, June.
    4. Wolfgang Franz & Viktor Steiner, 2000. "Wages in the East German Transition Process: Facts and Explanations," German Economic Review, Verein für Socialpolitik, vol. 1(3), pages 241-269, 08.
    5. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
    6. Michael C. Burda, 2006. "Factor Reallocation in Eastern Germany after Reunification," American Economic Review, American Economic Association, vol. 96(2), pages 368-374, May.
    7. Sinn, Hans-Werner, 2002. "Germany's Economic Unification: An Assessment after Ten Years," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 113-28, February.
    8. George A. Akerlof & Andrew K. Rose & Janet L. Yellen & Helga Hessenius, 1991. "East Germany in from the Cold: The Economic Aftermath of Currency Union," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 1-106.
    9. Bernd Fitzenberger & Wolfgang Franz & Oliver Bode, 2008. "The Phillips Curve and NAIRU Revisited: New Estimates for Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 228(5+6), pages 465-496, December.
    10. Hughes Hallett, A J & Ma, Yue, 1993. "East Germany, West Germany, and Their Mezzogiorno Problem: A Parable for European Economic Integration," Economic Journal, Royal Economic Society, vol. 103(417), pages 416-28, March.
    11. Burda, Michael C. & Fuchs-Schündeln, Nikola & Buch, Claudia M. & Sinn, Hans-Werner, 2006. "Factor reallocation in eastern Germany after reunification," Munich Reprints in Economics 19974, University of Munich, Department of Economics.
    12. Rudiger Dornbusch & Holger Wolf, 1992. "Economic Transition in Eastern Germany," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 235-272.
    13. Dennis J. Snower & Christian Merkl, 2006. "The Caring Hand that Cripples: The East German Labor Market after Reunification," American Economic Review, American Economic Association, vol. 96(2), pages 375-382, May.
    14. Hans-Werner Sinn, 1995. "Staggering along: wages policy and investment support in East Germany," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(4), pages 403-426, December.
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    Cited by:
    1. Wolfgang Nagl, 2012. "Better Safe than Sorry? The Effects of Income Risk, Unemployment Risk and the Interaction of these Risks on Wages," Ifo Working Paper Series Ifo Working Paper No. 148, Ifo Institute for Economic Research at the University of Munich.

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