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Explaining the Low Labor Productivity in East Germany - A Spatial Analysis

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  • Rima Izem

    (Harvard University)

  • Nicola Fuchs-Schuendeln

    (Harvard University)

Abstract

This paper sheds light on the specificity or transferability of human capital by analyzing the unique event of German Reunification. We explore whether the comparatively low labor productivity in the East is caused by the depreciation of human capital at reunification, or by unfavorable job characteristics. East German workers should have been hit harder by reunification the more specific human capital was. Treating both human capital and job characteristics as unobservables, we derive their relative importance in explaining the low labor productivity by estimating a spatial structural model and analyzing the commuting behavior across the former East-West border and the resulting regional unemployment rates. The identification of the model comes from the slope of the unemployment rate across the former border: the larger the human capital differences between East and West, the less commuting across the border takes place, and the sharper is the increase of the unemployment rate at the former border. The results indicate that East and West German skills are very similar, while job characteristics differ significantly between East and West. They hence suggest that a significant part of the human capital accumulated in the East before 1990 was transferable.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 378.

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Date of creation: 2007
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Handle: RePEc:red:sed007:378

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Cited by:
  1. Susanne Prantl & Alexandra Spitz-Oener, 2013. "Interacting Product and Labor Market Regulation and the Impact of Immigration on Native Wages," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2013_22, Max Planck Institute for Research on Collective Goods.
  2. Kuehn, Zoe, 2012. "Migration, Wages, and Parental Background: Obstacles to Entrepreneurship and Growth in East Germany," MPRA Paper 49250, University Library of Munich, Germany.
  3. Heineck, Guido & Süssmuth, Bernd, 2013. "A different look at Lenin’s legacy: Social capital and risk taking in the Two Germanies," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 789-803.
  4. 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.
  5. Bartz, Kevin & Fuchs-Schündeln, Nicola, 2012. "The Role of Borders, Languages, and Currencies as Obstacles to Labor Market Integration," CEPR Discussion Papers 8987, C.E.P.R. Discussion Papers.
  6. Friehe, Tim & Mechtel, Mario, 2014. "Conspicuous consumption and political regimes: Evidence from East and West Germany," European Economic Review, Elsevier, vol. 67(C), pages 62-81.
  7. Merkl, Christian & Snower, Dennis J., 2008. "Escaping the unemployment trap: The case of East Germany," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 542-556, December.
  8. Olga A. Demidova, 2014. "The asymmetric spatial effects for eastern and western regions of Russia," HSE Working papers WP BRP 50/EC/2014, National Research University Higher School of Economics.

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