East German Labour Markets

Welfare State Reform and the Challenge of Transition
Christian Merkl, Dennis Snower

This project explores how the phenomenon of "the caring hand that cripples" unfolded in East Germany. In this light, East Germany becomes a particularly important case study of the pitfalls to transition, and one that makes us confront the central weaknesses of many European welfare systems.

This project analyzes this pitfall and provides proposals for reform.

The East German labor market has made disappointing progress since German reunification, particularly with regard to its unemployment rate. Its East European neighbors, who went through the transition from Communism at around the same time, have done far better. At first sight, this contrast seems hard to explain. After all, the East Germans have been the envy of their newly capitalist neighbors. They received well-functioning legal and welfare systems, massive infrastructure investment, and an orderly privatization process—all financed by a massive flow of transfers from West Germany, a flow that shows no signs of abating. Never before has a region received such immense support in the move to a capitalist system. Never again, most probably, will a fledgling adjust to the free market with such a large silver spoon in its mouth. What went wrong?

The answer, we will argue here, is that the East German labor market has remained stunted precisely because of all the support the East Germans have received. Children with silver spoons in their mouths have difficulty becoming self-sufficient adults. When people seek a smooth transition to the free market, the silver-spoon treatment turns out to be a hindrance rather than a help.

Publications

Merkl, C., Snower, D. (2008). East German Unemployment: The Myth of the Irrelevant Labor Market. Journal of Post Keynesian Economics, 31 (1), 151-166.

Merkl, C., Snower, D. (2008). Escaping The Unemployment Trap: The case of East Germany. Journal of Comparative Economics, 36 (4), 542-556.

Merkl, C., Snower, D. (2007). Escaping the Unemployment Trap - The Case of East Germany. Kiel Working Paper, 1309, Kiel Institute for the World Economy, Kiel, 27 pp.

Several Authors, (2007). What Went Wrong in East Germany and What Can Be Done? A Collection of Kiel Working Papers. Kiel Working Paper Collection, No. 1, Kiel Institute for the World Economy, Kiel

Snower, D., Merkl, C. (2006). The Caring Hand that Cripples: The East German Labor Market after Reunification. American Economic Review, 96 (2), American Economic Association, 375-382.

Snower, D., Merkl, C. (2006). The Caring Hand that Cripples: The East German Labor Market After Reunification (Detailed Version). Kiel Working Paper, 1263, Institut für Weltwirtschaft, Kiel, 42 pp.