CER | East Germany: Almost There

Almost There
Part five:
Unemployment,
the one lasting problem
Dr Bernhard Seliger

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After ten years of unification, East Germany shows, in many respects, an impressive performance and most economic indicators show a growing convergence with the West. This convergence, however, is taking much longer than the Germans thought it would in the early days of unification and is mainly paid for by massive financial transfers mounting up to more than 1800 billion Deutschmarks to date.

	1991	1995	1999
GDP / per capita	31	55	56
Net income / employee	55	82	86
Hourly labour cost	49	67	69
Productivity	33	53	56
Per unit labour cost	151	135	123
Export quota	52	40	53
Investment / capita	63	148	135
Unemployment	207	198	225
(West Germany = 100)

[Source: Institut der Deutschen Wirtschaft, Cologne]

The situation of the labour market is particularly disappointing. In May 2000, the average unemployment rate in East Germany was 16.9 per cent, more than twice the West German rate of 7.5 per cent. In some regions, especially the weak North-East, unemployment is well above 20 per cent. Before the Second World War, the Central German regions of Saxony, Thuringia and the area around Berlin had been the industrial core of Germany. In the former GDR, the prominent role of heavy industry and the neglect of light and consumer industries further fostered this role.

Competitiveness vs productivity

After unification, these industries suddenly had to compete internationally. However, given their old capital stock, the new demand conditions and the loss of traditional trade links as well as the monetary unification and its revaluation effects in East Germany, their productivity was not sufficient to allow them to compete. To increase productivity, firms tried to get rid of the less productive workers.

In the time of central planning, firms were interested in receiving as many resources and workers as possible to fulfil their production quotas. This "labour hoarding" was useless after unification, and many firms retained only 30, or even 10 per cent of their former employees. Newly created firms could not absorb the dismissed workers fast enough and mass unemployment resulted.

From 1989 to 1993, the number of employees in East Germany decreased from 9.9 million to only 6.2 million. Since this figure includes newly created employment, it can be said that around half of the workers in the former GDR lost their job. The state tried to upgrade the qualifications of East Germans through an active labour market policy, but it often lacked knowledge about the qualifications needed in the private labour market. For the older unemployed in particular, the possibility of finding a job was small. Migration to West Germany, especially in border regions, played an important role in alleviating the problem of unemployment.

In this situation, the effect of the wage policy was disastrous: the trade unions demanded a fast wage convergence in accordance with their slogan of "same payment for the same kind of work." Given the different productivity levels in the East and the West and the varying relative scarcity of labour and capital, this slogan missed the point. More importantly, in the bipartite negotiation system transferred from West Germany, trade unions had no equal partner.

Productivity vs wages

In the first years after unification, managers of not yet privatised firms were mostly appointed for a transition period by the state and were not interested in entering conflicts with the labour force. The employers' associations were staffed by West German managers who had no interest in promoting low-cost competitors in East Germany. The result of this asymmetry was a dramatic increase in wages: in 1992, East German wages rose by more than 35 per cent, in 1993 by an additional 15 per cent and in the following two years by more than five per cent each. While productivity also increased during that time, the productivity wage gap was not closed; even today, production per unit still is, on average, 20 per cent more expensive in the eastern regions of Germany.

For East Germans, the resulting convergence of income is impressive. Today, the net income of employees is more than 85 per cent of the Western average. Also, pensions rose by 165 per cent since 1990, while in West Germany they rose only by 23 per cent. But the costs of this strategy were high, not only in terms of increasing debt levels and huge transfers but also in terms of the inflexibility of the economy and of unemployment. In a dynamic, growing economy, for additional employment to be created wages have to rise less than productivity.

In East Germany, the opposite was the case. As a result, the catching up process of East Germany came to an end in three years. The upswing in the East was not self-sustaining but was, instead, largely financed by the West. It should be noted that de-industrialisation and mass unemployment also mean social and regional problems: not all regions are similarly affected, and some regions in north-east Germany are now depopulating.

The state tried to alleviate these problems with more than 150 different programs of regional, economic and technological aid. However, after ten years of unification, it can be said that the state largely failed in this task. Instead of intervening in the economic process, the state should try to create a framework for competition between regions. The rigidity of the German labour market is one of the hindrances for such competition. The overwhelming majority of employees is covered by wage contracts negotiated at an industrial level, not leaving room for the needs and problems of individual firms.

No more miracles

In this respect, East Germany, with its specific transformation problems, might become a role model for reforms in the West German labour market as well.
Due to the rigidity of bilateral negotiations, many East German employers had left the employers' association and negotiated wages on company level. With this strategy, they could preserve competitive wage levels, which also had an impact on West Germany, where an increasing number of opening clauses in wage contracts allow for flexibility in difficult economic environments for firms.

Ten years after the German unification, the success of economic policies is mixed. Today, East Germans enjoy a much higher standard of living than ten years ago and than all other Central and East European transforming countries. But for a successful economic catching up process, a lot of reforms in Germany as a whole are needed. The "economic miracle" of West Germany after 1948 could not be repeated by East Germany. In the meantime, Germany accumulated more and more rigidities in its goods and factor markets. Given the unwillingness of the population to accept cumbersome reforms in these areas, political decision-makers have avoided them so far. Overcoming this "reform traffic jam" is the main challenge after ten years of unification.

Dr Bernhard Seliger, 5 February 2001

The author works at the Graduate School of International Area Studies of Hankuk University of Foreign Studies and also does research at the University of Witten/Herdecke, Germany.

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