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Divergence in Labour Force Growth in Open Economies: Should Wages and Prices Grow Faster in Germany?

Author

Listed:
  • Thomas Beissinger

    (Universität Hohenheim = University of Hohenheim, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics)

  • Joël Hellier

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - ULCO - Université du Littoral Côte d'Opale - Université de Lille - CNRS - Centre National de la Recherche Scientifique, LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université)

  • Martyna Marczak

    (Trinity College Dublin)

Abstract

We develop a model which shows that wages, prices, and the real per-capita income should grow more rapidly in open economies with low labour force growth. Otherwise, their trade partners experience rising unemployment and/or trade deficits. We apply this framework to Germany, which has exhibited modest labour force growth, except at the moment of reunification. Goods being differentiated by country of origin (Armington's hypothesis), low labour force growth limits German production and should lead to rising prices and wages relative to other countries. This mechanism is magnified by the low price elasticity of demand for German goods. Hence, German wage moderation could constrain other countries' policy options. Simulations using an extended version of the model suggest that (i) disparities in labour force growth have had a significant impact on unemployment within the Eurozone, potentially contributing to the severe economic crisis faced by Southern European countries between 2010 and 2015, and (ii) the demographic shock following reunification could explain a large part of the German economic challenges from 1995 to 2005.

Suggested Citation

  • Thomas Beissinger & Joël Hellier & Martyna Marczak, 2025. "Divergence in Labour Force Growth in Open Economies: Should Wages and Prices Grow Faster in Germany?," Post-Print hal-05627604, HAL.
    • Handle: RePEc:hal:journl:hal-05627604
    DOI: 10.1057/s41294-025-00266-0
    Note: View the original document on HAL open archive server: https://hal.science/hal-05627604v1
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