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The Caring Hand that Cripples: The East German Labour Market after Reunification

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  • Merkl, Christian
  • Snower, Dennis J.

Abstract

The East German labor market has hardly made any progress since German reunification, despite massive migration flows and support from the West. We argue that East Germany is in trouble precisely because of the support it has received. This paper explores the phenomenon of 'the caring hand that cripples,' arising from bargaining by proxy, the adoption of the West German welfare system and the associated employment persistence. Even the steady decrease of labour cost (normalized by productivity) since the beginning of the 1990s did not help to kick start the East. We suggest that labor force participants fell into 'traps,' concerning low skills, ageing of the workforce, labour-saving capital and skills, capital underutilization, and unemployment arising from the decline of the tradeable sector.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5656.

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Date of creation: May 2006
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Handle: RePEc:cpr:ceprdp:5656

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Keywords: German unification; labour market traps; labour markets;

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  1. 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.
  2. Yu-Fu Chen & Michael Funke, 2003. "Labour Demand in Germany: An Assessment of Non-Wage Labour Costs," CESifo Working Paper Series 952, CESifo Group Munich.
  3. Dennis J. Snower & Christian Merkl, 2006. "The Caring Hand that Cripples: The East German Labor Market After Reunification (Detailed Version)," Kiel Working Papers 1263, Kiel Institute for the World Economy.
  4. David Coe & Dennis Snower, 1996. "Policy Complementarities: The Case for Fundamental Labor Market Reform," Archive Discussion Papers 9625, Birkbeck, Department of Economics, Mathematics & Statistics.
  5. Wilke, Ralf A., 2004. "New Estimates of the Duration and Risk of Unemployment for West-Germany," ZEW Discussion Papers 04-26, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Henning Klodt, 2000. "Industrial Policy and the East German Productivity Puzzle," German Economic Review, Verein für Socialpolitik, vol. 1(3), pages 315-333, 08.
  7. 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.
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