Job Movement and Real Wage Flexibility in Eastern and Western Parts of Germany
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Job Movement and Real Wage Flexibility in Eastern and Western Parts of Germany Fei Peng 1 & Sajid Anwar 2,3
& Lili
Kang 4
# Academy of Economics and Finance 2020
Abstract We use a unique microdata set that covers the 1984–2009 period to estimate real wage flexibility in Eastern and Western parts of Germany. Empirical analysis reveals that wages of male job stayers in the Eastern and Western parts of Germany are rigid, which leads to significant wage flexibility for internal and external movers. At the aggregate level, wages of the external movers are more flexible than the wages of job stayers in bust periods (when labour market is slack) and more rigid than the wages of job stayers in boom periods (when labour market is tight). In overall terms, the West German labour market is mature but conditions in the East German labour market are consistent with transition economies. Wage flexibility in Germany’s labour market can be attributed to relatively more flexible wages of the external and internal movers in a slack labour market. Keywords Real wage flexibility . Job movement . Unemployment . Eastern and Western
Germany JEL classification E32 . J31 . K31 . J64 . M55
1 Introduction Using micro panel data, this paper considers the issue of real wage flexibility over the business cycle in Eastern and Western parts of Germany. While the existing studies have focused on countries where labour market is relatively free, such as the UK (e.g.,
* Sajid Anwar [email protected] Fei Peng [email protected] Lili Kang [email protected] Extended author information available on the last page of the article
Journal of Economics and Finance
see Devereux and Hart 2006) and the US (e.g., see Shin and Solon 2007; Elsby et al. 2016), the German labour market is an interesting case study because of its relatively higher level of regulation and core-periphery segmentation of the labour force, where a core work force is protected from wage cuts and layoffs while a peripheral work force provides a buffer for shocks and suffers from wage cuts and more insecure jobs (Cornelißen and Hübler 2008; Garz 2013; Stüber 2017; Snell et al. 2018). Conditions in Germany’s labour market and labour market institution are very different from the US, which is a traditional immigrant country. For example, Germany’s labour market is heavily regulated and the collective bargaining power, union density and coverage are much higher than the US (Constant and Massey 2005). Moreover, rapid integration of the East German labour market with West German market led to a sharp decrease in employment in the East (from 9.6 million in 1989 to only 6.1 million in 1993). More than two thirds of the formal jobs in manufacturing, agriculture and public sector, particularly for women, were lost in East Germany in the early years of the 1990s (Grünert and Lutz 1995). A large number of the remaining jobs were temporarily subsidised. East German workers tend to be mostly employed with shorter tenure in periphery or secondary sectors such as the service and construction, whi
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