Wage Adjustment, Competitiveness and Unemployment – East Germany after Unification

Abstract

Summary Nearly 20 years after unification large differences of the labor market situation in East and West Germany persist. Wages are still considerably lower, the unemployment rate is about twice of the West German level, and the competitiveness of the East German economy seems to be low. This paper analyzes the process of (relative) wage adjustment in East Germany and the resulting development of competitiveness and unemployment differentials. We present estimates of the wage adjustment in East vs. West Germany based on wage convergence and effects of unemployment on wage growth. The central focus of the paper is the empirical analysis of the interaction of the development of competitiveness and the labor market situation. The results reveal large equilibrium gaps for wages and unemployment which are based on the wage-setting process, the behavior of competitiveness and the adjustment of unemployment.