Escaping the unemployment trap: The case of East Germany

Arbeitspapier

This paper addresses the question of why prolonged regional unemployment differentials tend to persist even after their proximate causes have been reversed (e.g., after wages in the highunemployment regions have fallen relative to those in the low-unemployment regions). We suggest that the longer people are unemployed, the greater is the likelihood of falling into a low-productivity "trap", through the attrition of skills and work habits. We develop and calibrate a model along these lines for East Germany and examine the effectiveness of three employment policies in this context: (i) a weakening of workers' position in wage negotiations due to a drop in the replacement rate or firing costs, leading to a fall in wages, (ii) hiring subsidies, and (iii) training subsidies. We show that the employment effects of these policies depend crucially on whether low-productivity traps are present.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Kiel Working Paper ; No. 1309

Classification and Topics

• Classification: Wirtschaft ; Unemployment: Models, Duration, Incidence, and Job Search ; Wage Level and Structure; Wage Differentials ; Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity ; Wages, Compensation, and Labor Costs: General
• Subject: labor market traps ; calibration ; East Germany ; labor markets ; Langzeitarbeitslosigkeit ; Arbeitsproduktivität ; Qualifikation ; Arbeitsmarktpolitik ; Kündigungsschutz ; Reform ; Lohnsubvention ; Berufsbildungspolitik ; Wirtschaftspolitische Wirkungsanalyse ; Schätzung ; Neue Bundesländer

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Merkl, Christian ; Snower, Dennis J.
• Event: Veröffentlichung
• (who): Kiel Institute for the World Economy (IfW)
• (where): Kiel
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/3960
• Last update: 10.03.2025, 11:44 AM CET