Transcript From Unification to Integration: Productivity and Labor

From Reunification to Economic
Integration: Productivity and Labor
Markets in East Germany
Michael Burda, Humboldt-Universität zu Berlin
Universita Bocconi
18.March 2002
East Germany ten years after: Facts
• After fast start, growth has stalled
• Convergence is incomplete:
–
–
–
–
Consumption
Wages
Productivity per employed
Productivity per capita
• Unemployment rate is high, employment ratio low
• As a result, fiscal transfers are high
Dimensions of Convergence, 1991 – 2000
(% of respective West German value)
Year
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Consumption
Nominal
weekly wage
Labor
productivity
GDP per
capita
Dimensions of Convergence, 1991 – 2000
(% of respective West German value)
Year
Consumption
1991
43
1992
54
1993
65
1994
70
1995
73
1996
72
1997
73
1998
73
1999
n.a.
2000
n.a.
Nominal
weekly wage
Labor
productivity
GDP per
capita
Dimensions of Convergence, 1991 – 2000
(% of respective West German value)
Year
Consumption
Nominal
weekly wage
1991
43
50
1992
54
65
1993
65
71
1994
70
72
1995
73
74
1996
72
72
1997
73
76
1998
73
76
1999
n.a.
76
2000
n.a.
73
Labor
productivity
GDP per
capita
Dimensions of Convergence, 1991 – 2000
(% of respective West German value)
Year
Consumption
Nominal
weekly wage
Labor
productivity
1991
43
50
44
1992
54
65
57
1993
65
71
67
1994
70
72
70
1995
73
74
71
1996
72
72
72
1997
73
76
72
1998
73
76
72
1999
n.a.
76
72
2000
n.a.
73
73
GDP per
capita
Dimensions of Convergence, 1991 – 2000
(% of respective West German value)
Year
Consumption
Nominal
weekly wage
Labor
productivity
GDP per
capita
1991
43
50
44
42
1992
54
65
57
50
1993
65
71
67
59
1994
70
72
70
64
1995
73
74
71
66
1996
72
72
72
67
1997
73
76
72
67
1998
73
76
72
66
1999
n.a.
76
72
66
2000
n.a.
73
73
65
Convergence and Integration
• We focus on labor productivity growth and
labor utilization
• Mechanisms of economic integration
• Back of the envelope: how much
investment, how much migration?
• Depends on assumptions about technology
Convergence and Integration
• We focus on labor productivity growth and
labor utilization
• Mechanisms of economic integration
• Back of the envelope: how much
investment, how much migration?
• Depends on assumptions about technology
Accounting for the Labor
Productivity Slowdown
• Not due to quantity of inputs
Investment Expenditures in Germany, 1991-1998
Land/Region
All eastern States
Annual investment-GDP
ratio, average,
1991-98 (%)
Annual investment per
capita, average, 1991-98
(DM, 1995 prices)
Cumulative investment,
1991-98, (bill. DM, 1995
prices)
Equipment
Structures
Equipment
Structures
Equipment
Structures
13.2
28.3
3562
7745
503.6
1094.4
Memo: GDP, 2000
all eastern States
All western states
Memo: GDP 2000
all western States
544.5
9.3
12.4
4063
5424
2071.5
3120.7
2766.5
Accounting for Slowdown in
Labor Productivity Convergence
• We construct estimates of states´capital
stocks using various boundary conditions
• Strong evidence of a slowdown in total
factor productivity (TFP) growth as
measured by the Solow residual since 1995
Sources of Growth in Germany, 1992-99
(log points per annum)
1992-1995
Region
1996-1999
Growth in
relative
valueadded
deflator*
Growth
in valueadded at
1995
prices*
Growth
due to
inputs
Solow
Resid.
All Eastern
states
3.2
6.8
2.4
4.4
All Western
states
-0.4
0.5
0.5
0.0
0.0
1.4
0.5
0.9
Total
Germany
Growth in
relative
value
added
deflator*
Growth
in valueadded at
1995
prices*
Growth
due to
inputs
Solow
Resid.
Sources of Growth in Germany, 1992-99
(log points per annum)
1992-1995
Region
1996-1999
Growth in
relative
valueadded
deflator*
Growth
in valueadded at
1995
prices*
Growth
due to
inputs
Solow
Resid.
Growth in
relative
value
added
deflator*
Growth
in valueadded at
1995
prices*
Growth
due to
inputs
Solow
Resid.
All Eastern
states
3.2
6.8
2.4
4.4
-0.1
1.2
2.0
-0.8
All Western
states
-0.4
0.5
0.5
0.0
0.0
1.9
0.8
1.1
0.0
1.4
0.5
0.9
0.0
1.8
0.9
0.9
Total
Germany
Explanations of the slowdown in
TFP growth since 1995
• Not the quality of labor – there has been
convergence of returns to skill
• Relative price effect (Ragnitz: 15-20%)
• Correcting for the cycle
• Infrastructure
• Firm size
• Composition effect
Table 12. Alternative estimates of total factor productivity growth,
1992-1999 (log points)
1992-1995
State/Region
1996-1999
Benchmark
estimates
from Table 8
Four age
employment
inputs
Four
population
age
classes
Benchmark
estimates
from Table 8
Four age
employment
inputs
Four ages
classes for
population
All Eastern
States
4.4
4.3
2.2
-0.8
-0.6
-1.6
All Western
States
0.0
-0.5
-0.8
1.1
0.9
1.0
Total Germany
0.9
0.5
-0.2
0.9
0.8
0.7
Utilization of Labor: Are labor
markets in the East working?
• Microeconometric analysis confirms
convergence in return to skill
• Relative improvement of Eastern women
• Inequality in East has now reached West levels
• Evidence on minimum wages is ambiguous
• How to reconcile unemployment and rigidities
with dramatic deunionization in the East
Utilization of Labor: Are labor
markets in the East working?
• Microeconometric analysis confirms
convergence in return to skill
• Relative improvement of Eastern women
• Inequality in East has now reached West levels
• Evidence on minimum wages is ambiguous
• How to reconcile unemployment and rigidities
with dramatic deunionization in the East
Mobility of Labor: Migration
• Cumulated migration high
• Low net flows belie large, heterogeneous
gross flows (young out, old in)
• Econometric results on net and gross flows
consistent with migration theory
– Destination wages, unemployment matter
– Source unemployment puzzling
– Effects are age-sensitive
• Implications
Mobility of Labor: Migration
• Cumulated migration high
• Low net flows belie large, heterogeneous
gross flows (young out, old in)
• Econometric results on net and gross flows
consistent with migration theory
– Destination wages, unemployment matter
– Source unemployment puzzling
– Effects are age-sensitive
• Implications
Summary
• Despite remarkable progress in the first half of 1990s,
growth in eastern Germany has stalled
• The problem is not a lack of K: cumulated investment
since 1991 roughly equals region´s cumulated current
account deficit ( 1.5 tril.DM)
• Sharp slowdown in TFP growth after 1995 is culprit
• Hard to explain at the individual level except for
logarithmic constant
Summary
• Plausible explanations?
– Slight composition effect resulting from
migration
– Infrastructure spending slowdown
– By elimination, ´soft´ factors must matter
• Migration is powerful force for integration
• Supply or demand?
Update (March 2004)
• Counterveiling developments:
– Collapsing construction sector
– Growing manufacturing sector
• Also relative to the West
West versus East German Production Index
450
400
West in 2003
(1998=100)
350
300
250
200
150
100
50
0
0
50
100
150
200
250
300
East in 2003 (1998=100)
350
400
Policy Recommendations
• Infrastructure investment in eastern Germany
should continue
• Scrap most active labor market programs:
take US evidence seriously! Spend savings
on better job services and monitoring, EITC,
or even wage subsidies
• Scale back investment tax subsidies
(especially structures)