Volume 2, Issue 4

There is no simple solution to the German unemployment dilemma. Neither too high wages, nor unionized central bargaining, nor the evidence of the effects of the welfare state deliver a simple explanation. The East German experience confirms this view. A solution needs to combine flexibility with economic growth. More flexible product markets could help to generate the higher demand for unskilled labour that is so badly needed.

This article argues that unions, job protection, and egalitarian pay structures may have as much to do with social insurance of otherwise uninsurable risks as with rent sharing and vested interests. In support of this more benign complementary hypothesis I discuss a range of historical, theoretical, and empirical evidence. The social insurance perspective changes substantially the assessment of often-proposed reforms of European labour market institutions. The benefits from eliminating labour market rigidities have to be set against the costs of reduced cover of human capital related risk. I also argue that it is unclear whether the forces of globalisation, and the new economy, will force countries to deregulate their labour markets.

Persistently high unemployment is still the most urgent problem confronting policymakers in many continental European countries. Policymakers were not idle but their activities often treated the symptoms rather than the real causes of the malaise in labor markets. A prerequisite for solving the unemployment problem is pushing for more competition in all markets, but in particular in the labor market. However, lack of competition allows insiders to capture rents, thus making them opposed to a rigorous competitive policy approach. It is often suggested that corporatism would be an alternative and possibly even superior solution, i.e., tripartist agreements involving unions, employer associations and the government. The paper argues that this is not the case. Rather, corporatism leads to even less competition and opens additional channels for externalizing the burden of adjustment to exogenous shocks on future generations and on taxpayers at large via the social security system. Globalization might in contrast help to overcome the problem because there are fewer rents to be captured by insiders, and more open goods and factor markets make labor demand more elastic, thus enforcing more moderate wage setting and more flexible wage structures.

This paper presents and evaluates two interpretations of the eastern German labour market. These interpretations are called `wage gap’ and `innovation gap’. The former follows standard neoclassical thinking and regards high eastern German unemployment as the consequence of too high a wage level. The latter follows endogenous growth theory and regards a lack of product innovations as the main constraint on output and employment growth in the eastern German economy. The paper argues that the `innovation gap’ explains the facts much better than the `wage gap’. From this, the paper draws conclusions for economic policy: given the high interregional mobility of the workforce and the erosion of collective bargaining in eastern Germany, the wage level is not an appropriate policy instrument anymore. Instead, policy should aim at strengthening the innovative power of the eastern German economy by supporting research and development in the region.

As the shadow economy is increasing in almost all OECD countries this paper analyses the theoretical reasons why people work in the shadow economy. Three approaches are presented, models of time allocation, transaction models and models of tax evasion. The major reason for a growing shadow economy is the rising tax and social security burdens, increasing government regulation and decreasing tax morale. The latest empirical results from Austria, Germany and Switzerland are presented.

Friedrich A. Hayek’s notion of division of knowledge arouses new interest in an economy for which knowledge represents the most important resource. Hayek’s problem was how to use the knowledge scattered in society efficiently. In Hayek’s solution the prices emerging by competition play the crucial role. They indicate to the individual agents what they can do expediently for their own advantage and also for society, even though they dispose only of limited (implicit) knowledge. But which conditions must be fulfilled in order that the agents are prepared to engage in an interactive process of division of knowledge? - New Institutional Economics does not yet answer this question. It is only interested in questions of interactions in view of a division of labor. Its central notion of transaction is not appropriate for the analysis of the interactive process of division of knowledge, where sharing of knowledge matters. The contribution of the article mainly consists in the attempt to provide a New Institutional Economics basis to the division of knowledge problem. ß