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What kind of shock was it? Regional Integration and Structural Change in Germany after Unification

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  • Michael C. Burda

Abstract

Eastern Germany’s recovery from the “unification shock” has been characterized by deep structural change – with apparent repercussions for the West as well – and an integration process involving both capital deepening (extensive and intensive investment) and labor thinning (net out-migration). I propose a constant-returns neoclassical model of economic integration which can account for these facts. Adjustment costs determine dynamics and steady state regional distribution of production factors. The model also explains persistent wage and capital rate-of-return differentials along the equilibrium path. Under competitive conditions, observed factor price differentials contain information on those adjustment costs.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1306.

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Length: 26 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:kie:kieliw:1306

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Keywords: German reunification; regional integration; costs of adjustment; capital mobility; migration;

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References

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  1. Harald Uhlig, 2006. "Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification," SFB 649 Discussion Papers SFB649DP2006-004, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Bachmann, Ronald & Burda, Michael C, 2007. "Sectoral Transformation, Turbulence, and Labour Market Dynamics in Germany," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6226, C.E.P.R. Discussion Papers.
  3. Andrew B. Abel, 2001. "On the Invariance of the Rate of Return to Convex Adjustment Costs," NBER Working Papers 8635, National Bureau of Economic Research, Inc.
  4. Richard Rogerson, 2005. "Sectoral Shocks, Specific Human Capital and Displaced Workers," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 89-105, January.
  5. 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(2), pages 1-92.
  6. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
  7. Burda, Michael C. & Fuchs-Schündeln, Nikola & Buch, Claudia M. & Sinn, Hans-Werner, 2006. "Factor reallocation in eastern Germany after reunification," Munich Reprints in Economics, University of Munich, Department of Economics 19974, University of Munich, Department of Economics.
  8. Hans-Werner Sinn, 2000. "EU Enlargement, Migration, and Lessons from German Unification," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 1(3), pages 299-314, 08.
  9. Eichengreen, Barry, 1990. "One Money for Europe? Lessons from the US Currency Union," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt6ks1k831, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  10. Michael C. Burda, 2006. "Factor Reallocation in Eastern Germany after Reunification," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 368-374, May.
  11. Snower, Dennis J. & Merkl, Christian, 2006. "The Caring Hand that Cripples: The East German Labor Market After Reunification (Detailed Version)," IZA Discussion Papers 2066, Institute for the Study of Labor (IZA).
  12. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(4), pages 777-93, August.
  13. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Juergen Schupp & Gert Wagner, 2005. "Individual Risk Attitudes: New Evidence from a Large, Representative, Experimentally-Validated Survey," Working Papers, The Field Experiments Website 2096, The Field Experiments Website.
  14. John Driffill & Marcus Miller, 2003. "No Credit for Transition: European Institutions and German Unemployment," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 50(1), pages 41-60, February.
  15. J.Peter Neary, 2001. "Of Hype and Hyperbolas: Introducing the New Economic Geography," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 39(2), pages 536-561, June.
  16. George A. Akerlof & Andrew K. Rose & Janet L. Yellen & Helga Hessenius, 1991. "East Germany in from the Cold: The Economic Aftermath of Currency Union," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 1-106.
  17. Nicola Fuchs-Schuendeln, 2005. "Adjustment to a Large Shock - Do Households Smooth Low Frequency Consumption?," 2005 Meeting Papers, Society for Economic Dynamics 517, Society for Economic Dynamics.
  18. Dennis J. Snower & Christian Merkl, 2006. "The Caring Hand that Cripples: The East German Labor Market after Reunification," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 375-382, May.
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Citations

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Cited by:
  1. Vollmer, Sebastian & Holzmann, Hajo & Ketterer, Florian & Klasen, Stephan, 2010. "Distribution Dynamics of Regional GDP per Employee in Unified Germany," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-461, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  2. Robert Orlowski & Regina T. Riphahn, 2009. "The East German wage structure after transition," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 17(4), pages 629-659, October.
  3. Harald Uhlig, 2006. "Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification," SFB 649 Discussion Papers SFB649DP2006-004, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Juan Carlos Martinez Oliva, 2009. "Riunificazione intertedesca e politiche per la convergenza," Mo.Fi.R. Working Papers, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences 14, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  5. Krkoska, Libor & Robeck, Katrin, 2008. "Business environment and enterprise behaviour in East Germany compared to West Germany and Central Europe," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 568-583, December.
  6. Andreas Schäfer & Thomas Steger, 2010. "History, Expectations, and Public Policy: Economic Development in Eastern Germany," CESifo Working Paper Series 3184, CESifo Group Munich.

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