Structural Unemployment and Real Wage Rigidity in Germany

Karl-Heinz Paqué develops a structural explanation of the long-term pattern of unemployment in West Germany for 1950-1990. Central to the explanation is the hypothesis that intersectoral structural change led to a hysteretic path of the unemployment rate, both in the periods of declining and chronically low unemployment until 1973 and of persistently high unemployment thereafter. The author takes a much wider perspective on structural change and its consequences for labor markets than does the standard mismatch approach. The central hypothesis is indirectly tested with a variety of methods and tools. Karl-Heinz Paqué shows econometrically that, in the relevant period, the wage structure between regions, sectors, and industries was not flexible enough to properly absorb shocks to employment. It is also argued that, for the post-unification period after 1990, the behavior of the eastern German labor market, in particular the trend toward a speedy East/West-wage equalization irrespective of the dramatic structural crisis, is fully compatible with prior West German experience.