Wage Policy in East Germany

Abstract

This paper assesses the impact of East Germany moving toward wage parity with West Germany within a few years on the goal of achieving quick convergence. Results of a simple econometric model of historical growth in West Germany for 1969–1985 suggest that the high wage-to-productivity policy has lowered overall economic growth. We apply these results to East Germany to estimate the amount of investment that would be required to achieve high growth targets in light of the growth-depressing effect of current wage policy. We find that the amount of investment required is far in excess of what Germany has historically maintained. Finally, our analysis shows that high growth becomes a more feasible outcome if wages are raised by less than productivity improvements.