The Labor Market and the Costs of Unification

THE TRANSFER OF MILLIONS OF GERMANS FROM THE EAST TO THE WEST AND THE RETURN HOME OF THOSE WHO HAD EMIGRATED ABROAD HAD SIGNIFICANT IMPACTS ON THE LABOR MARKET, EXPLAINS GIANMARCO OTTAVIANO

In the eleven years following the German reunification, more than two million people fled from East Germany to West Germany. That was not the only immigration wave in late twentieth-century Germany. Between 1988 and 2001, 2,800,000 Germans living abroad returned to their homeland.

“What are the effects of these waves of immigration on the labour market?”, Gianmarco Ottaviano asks. “The decision to open the border was made on a purely political, not economical ground. It therefore allows us to separate cause and effect. Also, the arrival of these new workers allows us to check what happens when immigrants enter the labor market without any cultural conflict”. According to the analysis of an administrative dataset on the German labor force in 1987-2001, native workers were not hurt by immigration, while previously migrated workers, mainly Greeks, Turks and Italians, suffered negative employment effects, in particular those with lower levels of education.

When 10 new immigrants joined the German labor force, 2 old immigrants lost their jobs. The wage effects were negligible. The authors suppose that new immigrants and previously migrated workers competed for the same jobs. The fact that they were not familiar with customs and traditions made them both unsuitable for jobs that required a high degree of interaction with customers. “The German market was highly regulated”, professor Ottaviano notes. “So, the wave of immigration impacted on the employment rate, not on wages. In the absence of these rigidities, adjusting wages would have cost the taxpayer less than spending on welfare”.

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