In November 1989 the opening of the border between the Federal Republic of Germany and the German Democratic Republic initiated a rapid process of political and economic unification which took place in 1990. Immediately after wards East Germany faced a breakdown of production and employment, but since 1991 a fast catching up of income began. Later on the convergence process faded out. Since 1996/1997, the growth rates of the East German economy are no longer higher than those of West Germany, despite enormous capital investment and massive help from the Federal Government. Recently the overall wage differential between East and West Germany amounts to about 25 percent, the productivity gap is about 1/3, unit labour costs are high, and unemployment is increasing.
This paper asks for the sources of the persisting East-West income differences. On the one hand, those differences could be related to the general economic conditions in East Germany, e.g. private and public capital accumulation, technological back wardness, infrastructure equipment or inappropriate economic institutions. On the other hand, those differences could be related to the people living and working there. One could think of differences of human capital equipment of the workers or, more general, of the inappropriateness of the qualification of the East German employees for the labour market conditions of a competitive market system. Basically we ask whether income differences are related to the location or to the people.
This paper is not about unemployment. As a consequence of East German wage increases well above productivity growth in the early nineties unit labour costs are about 10 percent above those in West Germany. Therefore the high and increasing unemployment should not come as a surprise. This story is already told in detail. The development of unemployment is an important part of the adjustment process in East Germany, but it is not the theme of our paper. Instead, our analysis focusses on the sources of East-West wage differentials for those who found jobs. Since 1996/1997 this wage differential amounts to about 25 percent, and the gap hardly became smaller until today.
The basic idea of the analysis is to identify the importance of individual characteristics of the East German employees for the wage differential, in contrast to the general conditions of the location in East Germany. For this purpose we ask what East German workers would have earned if their working place would have been in West Germany instead of East Germany. Of course, for those living and working in East Germany we cannot observe the income which they could have earned in the West (and the other way round). For some people we can estimate the income they could have earned in West Germany: migrants and commuters.
Our analysis concentrates on the development of earnings of East-West migrants, West-East migrants and commuters are left out. The post-unification process saw a large number of East-West migrants, and until 2003 about 10-15 percent of the East German population moved towards West Germany. In the early nineties most of them lived and worked in East Germany; in the more recent years most of them lived and worked in West Germany. As a starting point, we look at the income that those migrants earned in West Germany, as compared with employees in East and West Germany, respectively. However, movers (migrants) typically differ from stayers, both in terms of observable and unobservable determinants of wage income. Therefore we have to take those differences into account.
For this purpose, we estimate standard Becker/Mincer type of earnings functions which controls for observable determinants of wage income. We then place the migrants into those earnings functions and compare their earnings in West Germany with those in East Germany before migration. The estimated difference is interpreted as the effect of migration or the effect of the location. Given the limited number of observations we will not be able to estimate the returns of migration for the individual migrants, but we might be able to answer the question for migrants as a group. As a by-product of our empirical analysis we obtain an estimate of the human capital loss of the East German economy through migration.
The next section gives a short overview of the stylized facts of the East German transition process. Section 3 discusses differences of income and observable determinants of income in East and West Germany. Section 4 presents stylized facts on East-West migration and discusses the estimation strategie. In section 5 the estimation results are presented. They show that migrants, while living and working in East Germany, recieve an income slightly below those of non-migrating workers in East Germany. Migrants living and working in West Germany, on the other hand, recieve an income only slightly below West German income. Thus it is the location which should be blamed, not the people. The paper concludes with a short summary and some implications for economic policy.
Contents
1 Introduction
2 The East German transition process
3 Qualification and income
4 East-West migration
5 Estimation results
6 Conclusion
References
Appendix
