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

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Author Info
Merkl, Christian
Snower, Dennis J.

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

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
P2 - Economic Systems - - Socialist Systems and Transition Economies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!]
    Other versions:
  2. David Coe & Dennis Snower, 1996. "Policy Complementarities: The Case for Fundamental Labor Market Reform," Archive Discussion Papers 9625, Birkbeck, Department of Economics, Mathematics & Statistics.
    Other versions:
  3. Henning Klodt, 2000. "Industrial Policy and the East German Productivity Puzzle," German Economic Review, Blackwell Publishing, vol. 1(3), pages 315-333, 08. [Downloadable!] (restricted)
  4. Sinn, Hans-Werner, 2002. "Germany's Economic Unification: An Assessment after Ten Years," Review of International Economics, Blackwell Publishing, vol. 10(1), pages 113-28, February. [Downloadable!] (restricted)
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  5. Yu-Fu Chen & Michael Funke, 2003. "Labour Demand in Germany: An Assessment of Non-Wage Labour Costs," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. 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. [Downloadable!]
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  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(2001-2), pages 1-92. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Harald Uhlig, 2008. "The Slow Decline of East Germany," NBER Working Papers 14553, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Brown, Alessio J G & Merkl, Christian & Snower, Dennis J., 2007. "Comparing the Effectiveness of Employment Subsidies," CEPR Discussion Papers 6334, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Orlowski, Robert & Riphahn, Regina T., 2008. "The East German Wage Structure after Transition," IZA Discussion Papers 3861, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. Merkl, Christian & Snower, Dennis J., 2008. "Escaping the Unemployment Trap: The Case of East Germany," IZA Discussion Papers 3681, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  5. Harald Uhlig, 2007. "Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification," Kiel Working Papers 1311, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  6. Michael C. Burda, 2007. "What kind of shock was it? Regional Integration and Structural Change in Germany after Unification," Kiel Working Papers 1306, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  7. Jens Rubart & Willi Semmler, 2007. "East German Unemployment from a Macroeconomic Perspective," Darmstadt Discussion Papers in Economics 187, Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology). [Downloadable!]
  8. Christian Merkl & Dennis Snower, 2008. "East German Unemployment: The Myth of the Irrelevant Labor Market," Kiel Working Papers 1435, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  9. 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. [Downloadable!]
    Other versions:
  10. Christian Merkl & Dennis J. Snower, 2007. "Escaping the Unemployment Trap — The Case of East Germany," Kiel Working Papers 1309, Kiel Institute for the World Economy. [Downloadable!]
  11. Sebastian Dullien & Ulrich Fritsche, 2006. "How bad is Divergence in the Euro-Zone? Lessons from the United States of America and Germany," Macroeconomics and Finance Series 200605, Hamburg University, Department Wirtschaft und Politik. [Downloadable!]
  12. Wolfgang Lechthaler & Christian Merkl & Dennis Snower, 2008. "Monetary Persistence and the Labor Market: A New Perspective," Kiel Working Papers 1409, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  13. Alessio J. G. Brown & Dennis Snower, 2009. "Incentives and Complementarities of Flexicurity," Kiel Working Papers 1526, Kiel Institute for the World Economy. [Downloadable!]
  14. Nicola Fuchs-Schündeln & Rima Izem, 2007. "Explaining the Low Labor Productivity in East Germany. A Spatial Analysis," Kiel Working Papers 1307, Kiel Institute for the World Economy. [Downloadable!]
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