Long-Lasting Labour Market Consequences of German Unification

Uwe Blien; Joachim Möller; Phan thi Hong Van; Stephan Brunow

doi:10.1515/jbnst-2015-1013

Abstract

This article shows how the impulses of the transformation process in eastern Germany have spread through the economy and the labour market. The form of transformation has long-term effects on the form of control over the economy; it is managed largely from western firms. This fact has manifold consequences for the innovation behaviour of plants, among others, which in turn is further related to productivity and thus to the labour market. We argue that this transfers further to persistently lower wages and higher unemployment rates in eastern compared with western Germany.

Keywords: German unification; regional unemployment; regional wage dynamics; wage inequality; wage curve; regional development; innovation; industrial structure; patents

JEL Classification: J31; R23; P31

Appendix on the IV analysis of Table 3

In Table 3, models 3 and 4, wages are treated as exogenous. Although Brunow and Blien (2015) provide evidence that the endogeneity of wages in a productivity analysis with the IAB Establishment Panel is weak, we follow their approach and address the potential endogeneity problem. Wages are instrumented with a lagged value of the previous year and additionally with the average wage paid in the region in the year before. This approach reduces the number of cases slightly.

Model 3 benefits from inclusion of industry fixed effects. Because some test statistics show problems with so high a number of dummies, we also calculate Model 4 without industry fixed effects. With Model 3, the Hansen’s J-test cannot be calculated. For the same model, the Sargan test is available. It indicates that the instruments are not valid, i. e., correlated with the error term. By excluding industry fixed effects in Model 4, the variance-covariance matrix can be estimated and the Sargan test and Hansen’s J-test provide valid test statistics. The instruments are valid in Brunow and Blien (2015), therefore, the over-identification restriction is satisfied. To exclude the possibility of weak instruments, we also test for under-identification. This is rejected by the Kleibergen-Paap test. Finally, we compare the OLS and IV results by means of the Hausman test. It favours the IV estimation.

Considering the parameters of interest, the models with fixed effects provide very similar results compared with those without fixed effects. In addition, the instrumentation leads only to minor changes.

Acknowledgement

Very valuable support by Michaela Fuchs, Stefan Fuchs, Thomas Rhein, and Antje Weyh (all IAB) and Joachim Ragnitz (ifo Dresden) is gratefully acknowledged. Any responsibility for the analysis remains with the authors.

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Published Online: 2016-2-18

Published in Print: 2016-3-1

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Supplementary Material

Long-Lasting Labour Market Consequences of German Unification

Abstract

Appendix on the IV analysis of Table 3

Acknowledgement

References

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Articles in the same Issue

Long-Lasting Labour Market Consequences of German Unification

Article

Abstract

Appendix on the IV analysis of Table 3

Acknowledgement

References

Supplementary Material

Articles in the same Issue

Articles in the same Issue

Articles in the same Issue