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Escaping the Unemployment Trap: The Case of East Germany

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Author Info
Merkl, Christian () (Kiel Institute for the World Economy)
Snower, Dennis J. () (Kiel Institute for the World Economy)

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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.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3681.

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Length: 2008 pages
Date of creation: Sep 2008
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Publication status: published in: Journal of Comparative Economics, 2008, 36 (4), 542-556
Handle: RePEc:iza:izadps:dp3681

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Related research
Keywords: labor market; labor market trap; East Germany;

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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
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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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.:
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    Other versions:
  6. Akerlof, George A & Yellen, Janet L, 1988. "Fairness and Unemployment," American Economic Review, American Economic Association, vol. 78(2), pages 44-49, May. [Downloadable!] (restricted)
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  10. Alessio J. G. Brown, & Christian Merkl & Dennis J. Snower, 2006. "Comparing the Effectiveness of Employment Subsidies," Kiel Working Papers 1302, Kiel Institute for the World Economy. [Downloadable!]
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  11. Decressin, Jorg & Fatas, Antonio, 1995. "Regional labor market dynamics in Europe," European Economic Review, Elsevier, vol. 39(9), pages 1627-1655, December. [Downloadable!] (restricted)
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  12. Henrik Jacobsen Kleven & Peter Birch S¯rensen, 2004. "Labour Tax Reform, the Good Jobs and the Bad Jobs," Scandinavian Journal of Economics, Blackwell Publishing, vol. 106(1), pages 45-64, 03. [Downloadable!] (restricted)
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  15. David Gray, 2004. "Persistent Regional Unemployment Differentials Revisited," Regional Studies, Taylor and Francis Journals, vol. 38(2), pages 167-176, April. [Downloadable!] (restricted)
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  18. Joachim Ragnitz, 2007. "Explaining the East German Productivity Gap — The Role of Human Capital," Kiel Working Papers 1310, Kiel Institute for the World Economy. [Downloadable!]
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  20. Taylor, Jim & Bradley, Steve, 1997. "Unemployment in Europe: A Comparative Analysis of Regional Disparities in Germany, Italy and the UK," Kyklos, Blackwell Publishing, vol. 50(2), pages 221-45.
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  23. McDonald, Ian M & Solow, Robert M, 1985. "Wages and Employment in a Segmented Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1115-41, November. [Downloadable!] (restricted)
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  25. Michael C. Burda, 2006. "Factor Reallocation in Eastern Germany after Reunification," American Economic Review, American Economic Association, vol. 96(2), pages 368-374, May. [Downloadable!]
  26. Hans-Werner Sinn & Frank Westermann, 2001. "Two Mezzogiornos," NBER Working Papers 8125, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  27. Christian Grund, 2006. "Severance payments for dismissed employees in Germany," European Journal of Law and Economics, Springer, vol. 22(1), pages 49-71, July. [Downloadable!] (restricted)
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  28. Michael Lechner & Conny Wunsch, 2007. "Active Labour Market Policy in East Germany: Waiting for the Economy to take off," Kiel Working Papers 1308, Kiel Institute for the World Economy. [Downloadable!]
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Full references

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. 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!]
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