Industry and Firm Size Wage Differentials and Employment in Eastern Germany

Dramatically declining employment and rising unemployment rates have characterized the labour market in Eastern Germany since economic, monetary and social union. This is the first empirical study which analyses the development of the wage structure after the union. With a large and growing slack in the labour market, downward pressure on wages might have been anticipated. Yet, wages climbed higher after unification due to the threat of migration and the process of wage bargaining. The Labour Market Monitor - a unique longitudinal survey of GDR residents taken between November 1990 and November 1991 - is used to estimate the extent of job turnover and wage differentials attributable to industries and firm size. It is then examined whether a positive association between wage changes and employment change exists, as postulated by wage competition models. However, the instruments for adjusting shortages (and surpluses) of labour. In this model high wage firms need only to open vacancies in order to expand employment. Empirically, we find that the changes in the pattern of industrial wage differentials are consistent with the job competition model, whereas the firm size wage differentials reflect the interplay of short-run shifts in labour demand and supply curves. Thus, it may be that fast transition process in Eastern Germany is being assisted by the prevailing industry and firm size wage structure.