Employment, welfare support and income distribution in east Germany

Abstract

This survey seeks to sketch how the income level and income equality both among social groups in the new Länder, and also in relation to the position in west Germany, have evolved as a consequence of the deep restructuring since 1990, as well as a result of the welfare systems put in place by the treaties establishing unification. The paper surveys the macroeconomic evolution and the attendant deep changes in the labour market, focusing in particular on the level of wage catchup with the west and on differentials by firm size, occupation and branch. It addresses initiatives to attack unemployment in the east and assesses the welfare safety net in the form of unemployment benefits and social assistance, as well as the pension system instituted. The relatively favourable pension provision and the broad coverage of the social benefit system have ensured that the deep economic restructuring has not led to widespread poverty, even if there is a pervasive feeling of insecurity. The effectiveness of the housing allowance system in moderating the impact of rent rises is also discussed. The paper finally addresses the question of income distribution in this rapid transition to the market, and shows that ‘income poverty’ has been contained to a level broadly equivalent to that of west Germany.