Publication

This paper analyzes why the East German labor market is hardly making any progress since German reunification, despite massive migration flows and support from the West. The authors argue that East Germany is in trouble precisely because of the support it has received. They explore the phenomenon of "the caring hand that cripples," arising from bargaining by proxy, the adoption of the West German welfare system and the associated employment persistence. They suggest that labor force participants fell into "traps," concerning low skills, ageing of the workforce, labor-saving capital, capital under-utilization, and unemployment arising from the decline of the trade sector.