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Wage Adjustment, Competitiveness and Unemployment – East Germany after Unification

  • Werner Smolny

    ()

    (University of Ulm)

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    Nearly 20 years after unification large differences of the labor market situation in East and West Germany persist. Wages are still considerably lower, the unemployment rate is about twice of the West German level, and the competitiveness of the East German economy seems to be low. This paper analyzes the process of (relative) wage adjustment in East Germany and the resulting development of competitiveness and unemployment differentials. We present estimates of the wage adjustment in East vs. West Germany based on wage convergence and effects of unemployment on wage growth. The central focus of the paper is the empirical analysis of the interaction of the development of competitiveness and the labor market situation. The results reveal large equilibrium gaps for wages and unemployment which are based on the wage-setting process, the behavior of competitiveness and the adjustment of unemployment.

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    Article provided by Justus-Liebig University Giessen, Department of Statistics and Economics in its journal Journal of Economics and Statistics.

    Volume (Year): 229 (2009)
    Issue (Month): 2-3 (June)
    Pages: 130-145

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    Handle: RePEc:jns:jbstat:v:229:y:2009:i:2-3:p:130-145
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    1. 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.
    2. Andrea Boltho & Wendy Carlin & Pasquale Scaramozzino, 1999. "Will East Germany become a new Mezzogiorno?," Chapters, in: Economic Growth and Change, chapter 13 Edward Elgar.
    3. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    4. Franz, Wolfgang & Steiner, Viktor, 1999. "Wages in the East German transition process: facts and explanations," ZEW Discussion Papers 99-40, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. Hughes Hallett, A J & Ma, Yue, 1993. "East Germany, West Germany, and Their Mezzogiorno Problem: A Parable for European Economic Integration," Economic Journal, Royal Economic Society, vol. 103(417), pages 416-28, March.
    6. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    7. Michael C. Burda, 2006. "Factor Reallocation in Eastern Germany after Reunification," American Economic Review, American Economic Association, vol. 96(2), pages 368-374, May.
    8. Bernd Fitzenberger & Wolfgang Franz & Oliver Bode, 2008. "The Phillips Curve and NAIRU Revisited: New Estimates for Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 228(5+6), pages 465-496, December.
    9. 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.
    10. Hans-Werner Sinn, 2000. "Germany's Economic Unification: An Assessment after Ten Years," NBER Working Papers 7586, National Bureau of Economic Research, Inc.
    11. Rudiger Dornbusch & Holger Wolf, 1992. "Economic Transition in Eastern Germany," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 235-272.
    12. 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.
    13. Franz, Wolfgang, 2003. "Will the (German) NAIRU Please Stand up?," ZEW Discussion Papers 03-35, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    14. Hans-Werner Sinn, 2000. "Germany's Economic Unification. An Assessment after Ten Years," CESifo Working Paper Series 247, CESifo Group Munich.
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