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Title:Escaping the unemployment trap: The case of East Germany PDF Logo
Authors:Merkl, Christian
Snower, Dennis J.
Issue Date:2007
Series/Report no.:Kiel Working Papers 1309
Abstract:This paper addresses the question of why prolonged regional unemployment differentials tend to persist even after their proximate causes have been reversed (e.g., after wages in the highunemployment regions have fallen relative to those in the low-unemployment regions). We suggest that the longer people are unemployed, the greater is the likelihood of falling into a low-productivity "trap", through the attrition of skills and work habits. We develop and calibrate a model along these lines for East Germany and examine the effectiveness of three employment policies in this context: (i) a weakening of workers' position in wage negotiations due to a drop in the replacement rate or firing costs, leading to a fall in wages, (ii) hiring subsidies, and (iii) training subsidies. We show that the employment effects of these policies depend crucially on whether low-productivity traps are present.
Subjects:Labor markets
Labor market traps
Calibration
East Germany
JEL:J64
J31
E24
J30
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des IfW
Kieler Arbeitspapiere, IfW

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