Kiel Working Papers, Kiel Institute for World Economics
No 1263:
The Caring Hand that Cripples: The East German Labor Market After Reunification (Detailed Version)
Dennis J. Snower and Christian Merkl
Abstract: The East German labor market has hardly made any progress
since German reunification, despite massive migration flows and support
from the West. We argue that East Germany is in trouble precisely because
of the support it has received. This paper explores the phenomenon of "the
caring hand that cripples," arising from bargaining by proxy, the adoption
of the West German welfare system and the associated employment
persistence. Even the steady decrease of labor cost (normalized by
productivity) since the beginning of the nineties did not help to kick
start the East. We suggest that labor force participants fell into "traps,"
concerning low skills, ageing of the workforce, labor-saving capital and
skills, capital underutilization, and unemployment arising from the decline
of the tradeable sector.
Keywords: German unification; labor markets; labor market traps; (follow links to similar papers)
JEL-Codes: E24; J3; P2; (follow links to similar papers)
42 pages, January 2006
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