Wage Differentials, Entry and the Job Generation Process in Germany

Based on information from the employment records of individual establishments in westernGermany (Federal Republic of Germany before the German unification) between 1977-1988, it is possible to shed some light on the characteristics and determinants of the job generation process. Data for this study were drawn from the Employment Statistics register of the Federal Office of Labour (Bundesanstalt flir Arbeit) and cover almost 80 per cent of total employment.The central finding of the paper is that trend employment growth is, to a large extent, accommodated by plant openings rather than by the expansion of already existing units. While new establishments are subject to high failure rates, the growth of survivors almost completely offsets job losses due to plant closures. Furthermore, statistical analyses of entries and exits provide some support for the hypothesis that reduced wage differentials within any sector negatively affect the pace of entry of new establishments.These results could be relevant for the current debate on the determinants of the poor employment performance of Germany in the 1980s. In pai1icular, they raise the possibility that reduced wage differentials, associated with labour market policies and collectivistic wage agreements in the 1980s, played an important role in lowering the job generation potential of western Germany.