Micro-macro links in West Germany's unemployment

The main point of this paper will be that West German unemployment in the late 1980's has a curious double character: while its genesis is largely determined by the macroeconomic events of the last two decades - two stabilization crises and one wage revolution -, its current state reveals strongly microeconomic features which call for micro rather than macro policy measures. To make our case, we proceed as follows. In section II of the paper, we clear up our use of the terms 'macro' and 'micro' which may diverge somewhat from the normal textbook wording. In section III, we evaluate four major macro-paradigms of unemployment in West Germany: the traditional Keynesian demand-gap and the neoclassical wage-gap approach, the transatlantic crowding-out theory as recently advanced by Fitoussi, Phelps (1988), and, at some length, the hysteresis- theory as pioneered by Blanchard, Summers (1986a, b, c; 1988). We shall argue that none of these paradigms provides a sufficient explanation of the current persistence of unemployment in Germany, but that some of them - notably the wage-gap and the hysteresis-theory - contain most valuable elements; what they all lack is a due account of the structural and institutional (i.e. the 'micro') elements which are likely to cement an economy's macro inclination towards hysteresis. In section IV, we try to fill this gap by postdelivering a summary of these elements, with a focus on the structure of long-term unemployment, regional disparities and structural change between sectors of economic activity. In the final section V, we briefly evaluate different employment policy options and, from our own standpoint, make a policy choice.