Wages, Prices, and International Trade

Abstract

West Germany experienced a considerable trade surplus until 1990 and was viewed as an “export champion” by many commentators. Even though the trade surplus of unified Germany plummetted after 1990, it has been improving continuously since 1991. Nevertheless, the economic policy debate today views gobal competition as one of the great economic challenges for Germany¹ and often considers the German labor market problems (especially concerning unemployment of low-skilled workers) as being aggravated by international competition from low-wage countries resulting in a loss of competitiveness of the German economy. Correspondingly, it is discussed intensively whether the high level of unemployment is due to the general wage level being too high and due to a lack of flexibility in the German wage structure caused by the prevailing wage bargaining system. A considerable increase in earnings inequality since the early 80’s has been observed for various industrial countries, the most prominent being the United States, see OECD (1993, 1996). Compared to the United States, the latter study (based on a fairly small set of descriptive statistics) shows that West Germany exhibits an exceptionally stable wage structure since the mid 80’s. Trends in international trade differ between West Germany and the United States, with the United States facing a large trade deficit since the early 80’s and West Germany a considerable trade surplus. And also trends in wage bargaining institutions differ between West Germany and the United States. The former did not experience the decline in unionism observed for the latter. Thus, West Germany provides a polar case to the developments in the United States in various aspects. The goal of this study is to analyze links between trade developments and the West German labor market and to explore what can be learnt from the differences to the United States, where the latter case is well documented in the literature.

“Two important mistakes that we make when we analyze data are: (1) taking the theory too seriously, and (2) not taking the theory seriously enough.”

Leamer (1996, section 3)