Job Movement and Real Wage Flexibility in Eastern and Western Parts of Germany

Abstract

We use a unique microdata set that covers the 1984–2009 period to estimate real wage flexibility in Eastern and Western parts of Germany. Empirical analysis reveals that wages of male job stayers in the Eastern and Western parts of Germany are rigid, which leads to significant wage flexibility for internal and external movers. At the aggregate level, wages of the external movers are more flexible than the wages of job stayers in bust periods (when labour market is slack) and more rigid than the wages of job stayers in boom periods (when labour market is tight). In overall terms, the West German labour market is mature but conditions in the East German labour market are consistent with transition economies. Wage flexibility in Germany’s labour market can be attributed to relatively more flexible wages of the external and internal movers in a slack labour market.