The Caring Hand that Cripples: The East German Labor Market after Reunification

Abstract

ABSTRACT The Caring Hand that Cripples: The East German Labour Market after Reunification* The East German labour 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 labour cost (normalized by productivity) since the beginning of the 1990s did not help to kick start the East. We suggest that labour force participants fell into 'traps,' concerning low skills, ageing of the workforce, labour-saving capital and skills, capital underutilization, and unemployment arising from the decline of the tradeable sector. JEL Classification: E24, J3 and P2 Keywords: German unification, labour market traps and labour markets Dennis J. Snower Kiel Institute for the World Economy Dusternbrooker Weg 120 24105 Kiel GERMANY Tel: (49 431) 8814 235 Fax: (49 431) 8814 501 Email: dennis.snower@ifw-kiel.de