Explaining the Low Labor Productivity in East Germany - A Spatial Analysis

This paper sheds light on the specificity or transferability of human capital by analyzing the unique event of German Reunification. We explore whether the comparatively low labor productivity in the East is caused by the depreciation of human capital at reunification, or by unfavorable job characteristics. East German workers should have been hit harder by reunification the more specific human capital was. Treating both human capital and job characteristics as unobservables, we derive their relative importance in explaining the low labor productivity by estimating a spatial structural model and analyzing the commuting behavior across the former East-West border and the resulting regional unemployment rates. The identification of the model comes from the slope of the unemployment rate across the former border: the larger the human capital differences between East and West, the less commuting across the border takes place, and the sharper is the increase of the unemployment rate at the former border. The results indicate that East and West German skills are very similar, while job characteristics differ significantly between East and West. They hence suggest that a significant part of the human capital accumulated in the East before 1990 was transferable.