[Publisher:] Institut für Weltwirtschaft (IfW) [Place:] Kiel [Year:] 1991
Kiel Working Paper 489
Is the wage structure too rigid? Since the mid-1970s, this question has been one of the most persistent themes of the economic policy debate in West Germany. In recent months, the question is asked with a new sense of urgency: after the political and economic unification of the country in 1990, a huge imbalance between the labour markets in the West and the post-communist East will be a fact of life for years to come so that common sense and economics speak in favour of a sustained interregional wage differentiation. However, actual wage agreements, which mostly envisage an equalization of wages between West and East by the mid-1990s, do not take this need for flexibility into account. In this paper, we shall take a fresh look at the empirical evidence on structural wage rigidity for the last four decades of economic history in West Germany. We shall do so by applying some more recently developed techniques of co-integration, which provide a useful framework for the economectric analysis of structural labour market disequilibria and their wage effects. While the subject of our inquiry is the West German labour market since the early 1950s, the results do have implications for what one might expect for the future in a united Germany which has taken over basically all institutional features of the West's so-called social market economy, including the predominance of collective bargaining in wage determination.