The slow decline of East Germany

Abstract

Fifteen years after German reunification, the facts about slow regional convergence have born out the prediction of Barro [Barro, Robert J., 1991. Eastern Germany's long haul. The Wall Street Journal, Dow Jones and Company, May 3], except that migration out of East Germany has not slowed down. I document that in particular the 18–29 year old are leaving East Germany, and that the emigration has accelerated in recent years. I document that low wages, high unemployment and increasing reliance on social security persist across wide regions of East Germany together with these migration patterns. To understand these patterns, I use an extension of the standard labor search model introduced in Uhlig [Uhlig, Harald, 2006. Regional labor markets, network externalities and migration: The case of German reunification. American Economic Review, Papers and Proceedings 96 (2), 383–387; Uhlig, Harald, 2008. A labor-search model of regional unemployment and migration. Draft, University of Chicago] by allowing for migration and network externalities. In that theory, two equilibria can result: one with a high networking rate, high average labor productivity, low unemployment and no emigration (“West Germany”) and one with a low networking rate, low average labor productivity, high unemployment and a constant rate of emigration (“East Germany”). The model does not imply any obviously sound policies to move from the weakly networked equilibrium to the highly networked equilibrium. Journal of Comparative Economics 36 (4) (2008) 517–541.