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Escaping the Unemployment Trap: The Case of East Germany

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  • Merkl, Christian

    ()
    (University of Erlangen-Nuremberg)

  • Snower, Dennis J.

    ()
    (Kiel Institute for the World Economy)

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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Bibliographic 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: 32 pages
Date of creation: Sep 2008
Date of revision:
Publication status: published in: Journal of Comparative Economics, 2008, 36 (4), 542-556
Handle: RePEc:iza:izadps:dp3681

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

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References

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  1. Michael Lechner & Ruth Miquel & Conny Wunsch, 2005. "The Curse and Blessing of Training the Unemployed in a Changing Economy: The Case of East Germany after Unification," University of St. Gallen Department of Economics working paper series 2005 2005-15, Department of Economics, University of St. Gallen.
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Citations

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Cited by:
  1. Yvonne Schindele, 2010. "How Long Does it Take to Become an Entrepreneurial Society - The Case of German Convergence in Self-Employment," Jena Economic Research Papers 2010-015, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  2. Gartner, Hermann & Merkl, Christian & Rothe, Thomas, 2009. "They are even larger! More (on) puzzling labor market volatilities," IAB Discussion Paper 200912, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  3. Juan Carlos Martinez Oliva, 2009. "Riunificazione intertedesca e politiche per la convergenza," Mo.Fi.R. Working Papers 14, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  4. Dennis J. Snower & Alessio J. G. Brown & Christian Merkl, 2009. "Globalization and the Welfare State: A Review of Hans-Werner Sinn's Can Germany Be Saved?," Journal of Economic Literature, American Economic Association, vol. 47(1), pages 136-58, March.

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