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The Caring Hand that Cripples: The East German Labor Market After Reunification (Detailed Version)

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  • Dennis J. Snower
  • Christian Merkl

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 labor cost (normalized by productivity) since the beginning of the nineties did not help to kick start the East. We suggest that labor force participants fell into "traps," concerning low skills, ageing of the workforce, labor-saving capital and skills, capital underutilization, and unemployment arising from the decline of the tradeable sector.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1263.

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Length: 42 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:kie:kieliw:1263

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

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  1. Schnabel, Claus, 2005. "Gewerkschaften und Arbeitgeberverbände: Organisationsgrade, Tarifbindung und Einflüsse auf Löhne und Beschäftigung," Discussion Papers, Friedrich-Alexander-University Erlangen-Nuremberg, Chair of Labour and Regional Economics 34, Friedrich-Alexander-University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
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