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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
730.
Find related papers by JEL classification: J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General J61 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Geographic Labor Mobility; Immigrant Workers O52 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Europe
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