Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification

Working Paper

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Fifteen years after German reunification, the facts about slow regional convergence have born

out the prediction of Barro (1991), except that migration out of East Germany has not slowed

down. I document that in particular the 18-29 year old are leaving East Germany, and that the

emigration has accelerated in recent years. To understand these patterns, I provide an

extension of the standard labor search model by allowing for migration and network

externalities. In that theory, two equilibria can result: one with a high networking rate, high

average labor productivity, low unemployment and no emigration (“West Germany”) and one

with a low networking rate, low average labor productivity, high unemployment and a

constant rate of emigration (“East Germany”). The model does not imply any obviously sound

policies to move from the weakly networked equilibrium to the highly networked equilibrium.

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