Introduction

Abstract

This year, we celebrate the twentieth anniversary of the fall of the Berlin Wall. German reunification was an extraordinary and unique political, economic, and sociological event, and while to a certain extent it can be described as a success story, remarkable challenges still exist today. In particular, marked differences in the economies of East and West Germany remain even 20 years after free movement between both parts of Germany was established. The first years after reunification were characterized by rapid convergence of the East German economy with the West, bringing impressive improvements in living conditions. Yet, after the mid-1990s, economic convergence stalled. Average wages in East German states climbed rapidly from 49 percent of the West German level in 1991 to 75 percent in 1995, but by 2008 had still only reached 78 percent of wages in the West German states. Similarly, GDP per capita in the East exhibited impressive growth in the early 1990s, rising from 33 percent of the West German level in 1991 to 60 percent in 1995; but by 2008 it had only advanced to 69 percent. The unemployment rate in the Eastern states had risen to double the level in the Western states by the end of 1991, where it has remained ever since (in March 2009 it was 14.2 in the East and 7.1 percent in the West). The five papers of this symposium analyse specific aspects of the experience of the East German labour market in the transition process, ranging from the wage structure, the effectiveness of active labour market programs, internal migration and the role of social networks in the labour market success of migrants, to a study of the detrimental effects of the regulation of entry to specific occupations. Helmut Orlowski and Regina T. Riphahn study the evolution of returns to tenure and experience in East and West Germany after reunification. They confirm the results of previous studies which documented that returns to experience and tenure in the East lagged behind those in the West in the early 1990s. They then proceed by showing that, while returns to tenure in the East caught up with returns in the West by the late 1990s, returns to experience still lag behind in the East even in the period 2002–2006. Especially medium and highly skilled individuals in the East are affected by these lower returns to experience as compared with similarly skilled individuals in the West. Strikingly, different returns to experience arise even for younger cohorts who gained all their experience after reunification. Evidence on returns earned by East Germans in the West German labour market and vice versa suggests that the differences in returns to experience exist because of a difference in the quality of experiences gained in the East or West German labour markets. It might be the case that on average more valuable skills are learned on the job in the West German labour market than in the East German one. The results of the paper by Riphahn and Orlowski raise doubts concerning the effectiveness of active labour market policy in the East, which includes many programs aimed at keeping unemployed individuals in the labour market, thereby increasing their experience. Michael Lechner and Conny Wunsch analyse the effectiveness of active labour market programs in East Germany directly. Expenditures on these programs peaked at almost 9 billion Euros in 1999, when more than 800,000 people participated in them. Lechner and Wunsch show that over a horizon of up to 2.5 years, most programs featured in the active labour market policy in East Germany fail to increase the employment chances of their participants in the regular labour market. Some programs actually decrease the employment chances of participants, namely especially of those participants who still have good employment chances in the regular labour market at the start of the programs. Moreover, the allocation of participants to the different programs exhibits inefficiencies. The authors caution that, while the active labour market programs fail to increase employment chances, they might still have other beneficial effects, for instance by providing participants with a regular daily structure and preventing social unrest. Moreover, the effectiveness of the programs might increase if one day the East German economy takes off. The next pair of papers in the symposium focus on migration of East Germans to the West. Over the period 1991–2006, 2.45 million people migrated from the territory of the former GDR to the territory of the former FRG (both excluding Berlin), which amounts to 16.6 percent of the population living in the Eastern states at the end of 1990. Nicola Fuchs-Schündeln and Matthias Schündeln show that, as migration theory would suggest, young and single or divorced individuals are more likely to migrate, as well as individuals with a college degree. Also, women have somewhat higher migration propensities than men among individuals who lived in the East before 1989. Over time, the migrant body is increasingly composed of young and educated individuals. This constitutes bad news for the East German economy, and the rise of migration in the late 1990s might indicate decreasing expectations of future convergence between both parts of Germany. Focusing on differences between temporary and permanent migrants, the two groups report remarkably different life satisfaction around the period of the move to the West: while the life satisfaction of permanent migrants increases significantly in the year of the move and stays above the life satisfaction before the move during the next three years, the life satisfaction of return migrants remains essentially flat throughout the migration episode. Last, Fuchs-Schündeln and Schündeln show that social ties to the origin and destination region as well as psychological factors play an important role in predicting the migration decision. The importance of social networks is further analysed in the paper by Helmut Rainer and Thomas Siedler. They go beyond the results of Fuchs-Schündeln and Schündeln by not only analyzing the role of social networks in predicting migration, but also their role in determining labour market outcomes of East Germans in the West German labour market, and by studying the possible mechanisms through which the effects of social networks work. Rainer and Siedler focus on social networks of East Germans in the West, and find that the presence of family in the West is an important predictor for the probability of migrating West. This is especially true for women. The theoretical literature suggests two reasons for this result: the information hypothesis states that social networks in the destination region increase the labour market prospects of migrants, while the integration hypothesis focuses on the migrants’ potential for adjustment and integration into the host community. Rainer and Siedler find significant support for the information hypothesis: migrants with relatives in the West are more likely to be employed full-time after migration, are less likely to remain out of the labour market, and experience higher earnings than migrants without family in the West. In the last symposium paper, Susanne Prantl and Alexandra Spitz-Oener use German reunification as a natural experiment to analyse whether the regulation of entry to specific occupations influences self-employment and occupational mobility. They thus follow a growing trend in the literature to analyse German Reunification not only in order to gain insights into the transition process, but also, by treating German Reunification as a natural experiment, to test vastly different theories, from the life cycle hypothesis over the importance of market access to the effect of asset ownership on relationship-specific investment (see Fuchs-Schündeln and Schündeln, 2005; Alesina and Fuchs-Schündeln, 2007; Fuchs-Schündeln, 2008; Redding and Sturm, 2008; Gebhardt, 2009). Spitz-Oener and Prantl focus on the German Trade and Crafts Code, which requires mandatory educational standards in order to become self-employed in certain occupations. This code was extended to East Germany after reunification. Since self-employment rates were very low in the East during the German Democratic Republic, one would expect a stronger detrimental effect of the German Trade and Crafts Code in the context of the East German transition than in the context of the mature West German economy, and indeed this is what Spitz-Oener and Prantl find. The entry regulation affects the difference in self-employment rates, as well as in occupational changes, between regulated and unregulated occupations more in East Germany than in West Germany. Moreover, the negative effect of the regulation is stronger for individuals who are more likely to be affected by it since they changed their occupation after their initial training. The significant detrimental effects of entry regulation in the context of the East German transition might be one reason for the slow pace of the convergence process. While the papers in the symposium speak for themselves and cover a wide, and certainly not exclusive, range of issues, they all provide micro evidence for significant challenges that still exist in the East German labour market even 20 years after the fall of the Berlin Wall.