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Migration and East-West German integration: some vignettes

Author: Burda, Michael C. ; Wyplosz, CharlesINSEAD Area: Economics and Political ScienceIn: The transformation of the socialist economies by Horst Siebert, 1992 Language: EnglishType of document: INSEAD ChapterNote: Please note that no copies are availableAbstract: Germany's quick economic and monetary unification, no doubt prompted by the migration tide, has been immediately followed by massive unemployment and a spectacular increase in real wages in the five new states. The fact that migration then dwindled has led most observers to discount its role, and focus instead on firms' closure and the attendant increase in unemployment, starting up a debate on the merits of wage subsidies. This chapter shows that migration is the central factor uniting the various elements of the puzzle. Incipient migration imposes an arbitrage relationship between Western and Eastern labour costs and is not necessarily socially undesirable. Once this is recognized, the case for wage subsidies is very much in doubt. Working through a variety of plausible examples (including migration and congestion costs, real wage rigidity in the Western part of the country, labour force heterogeneity and endogenous growth), the paper characterizes the social optimum and contrasts the market outcome
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Germany's quick economic and monetary unification, no doubt prompted by the migration tide, has been immediately followed by massive unemployment and a spectacular increase in real wages in the five new states. The fact that migration then dwindled has led most observers to discount its role, and focus instead on firms' closure and the attendant increase in unemployment, starting up a debate on the merits of wage subsidies. This chapter shows that migration is the central factor uniting the various elements of the puzzle. Incipient migration imposes an arbitrage relationship between Western and Eastern labour costs and is not necessarily socially undesirable. Once this is recognized, the case for wage subsidies is very much in doubt. Working through a variety of plausible examples (including migration and congestion costs, real wage rigidity in the Western part of the country, labour force heterogeneity and endogenous growth), the paper characterizes the social optimum and contrasts the market outcome

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