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East German Unemployment: The Myth of the Irrelevant Labor Market

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  • Christian Merkl
  • Dennis Snower

Abstract

This paper indicates that East Germany’s unemployment originates primarily in the labor market, caused by the fast wage adjustment after German reunification. We model the resulting labor market traps in a search and matching framework, show that they are difficult to overcome, and provide empirical evidence. We argue that under these circumstances, demand-side policies are effective mainly when they increase the economy’s overall productivity and thereby help overcome the labor market traps

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1435.

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Length: 20 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:kie:kieliw:1435

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Keywords: unemployment; labor market trap; East Germany;

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References

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  1. Brücker, Herbert & Trübswetter, Parvati, 2004. "Do the Best Go West? An Analysis of the Self-Selection of Employed East-West Migrants in Germany," IZA Discussion Papers 986, Institute for the Study of Labor (IZA).
  2. Harald Lehmann & Udo Ludwig & Joachim Ragnitz, 2005. "Originäre Wirtschaftskraft der neuen Länder noch schwächer als bislang angenommen," Wirtschaft im Wandel, Halle Institute for Economic Research, vol. 11(5), pages 134-145.
  3. Jennifer Hunt, 2000. "Why Do People Still Live in East Germany?," Discussion Papers of DIW Berlin 201, DIW Berlin, German Institute for Economic Research.
  4. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2010. "Monetary persistence and the labor market: A new perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 968-983, May.
  5. Hans-Werner Sinn, 1995. "Staggering along: wages policy and investment support in East Germany," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(4), pages 403-426, December.
  6. Burda, Michael C. & Härdle, Wolfgang & Müller, Marlene & Werwatz, Axel, 1997. "Semiparametric analysis of German East-West migration intentions: Facts and theory," SFB 373 Discussion Papers 1998,3, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  7. Burda, Michael C., 1993. "The determinants of East-West German migration: Some first results," European Economic Review, Elsevier, vol. 37(2-3), pages 452-461, April.
  8. Dennis J. Snower & Christian Merkl, 2006. "The Caring Hand that Cripples: The East German Labor Market after Reunification," American Economic Review, American Economic Association, vol. 96(2), pages 375-382, May.
  9. 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.
  10. repec:wop:humbsf:1998-3 is not listed on IDEAS
  11. Christian Merkl & Dennis J. Snower, 2007. "Escaping the Unemployment Trap � The Case of East Germany," Kiel Working Papers 1309, Kiel Institute for the World Economy.
  12. John B. Hall & Udo Ludwig, 2007. "Explaining persistent unemployment in eastern Germany," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 29(4), pages 601-619, July.
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