Introduction

Abstract

West Germany experienced a sharp increase in unemployment during the 70’s and 80’s. While real wages increased moderately during the economic recovery of the 80’s, unemployment rates have remained on a high level ever since with the exception of the unification boom (1990–1992). The problem of high and persistent unemployment rates has been discussed intensively by the economic policy debate in Germany for many years, see the recent reports of the German Council of Economic Experts (1994, 1995, 1996). The discussion often points to the high level of wages in international comparison, the insufficient degree of wage differentiation, and the impact of labor market institutions and governmental regulations as the reasons for the dismal unemployment experience in West Germany, see Paqué (1995) or Siebert (1995a, 1997).

The European unemployment problem and the US inequality problem are two sides of the same coin.

Krugman (1994)