Read on TwitterResult: adoption of West institutions in East Germany led to labor reallocation, unravelled previous misallocation and triggered wage growth.
Link: https://bit.ly/3sUkCLA .
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After too many years, new working paper with Dauth, Lee, and @SebastianFind finally posted https://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten">Result: adoption of West institutions in East Germany led to labor reallocation, unravelled previous misallocation and triggered wage growth. Link: https://bit.ly/3sUkCLA&q... https://abs.twimg.com/emoji/v2/... draggable="false" alt="🧵" title="Thread" aria-label="Emoji: Thread">" title="https://abs.twimg.com/emoji/v2/... draggable="false" alt="📢" title="Lautsprecheranlage" aria-label="Emoji: Lautsprecheranlage"> After too many years, new working paper with Dauth, Lee, and @SebastianFind finally posted https://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten">Result: adoption of West institutions in East Germany led to labor reallocation, unravelled previous misallocation and triggered wage growth. Link: https://bit.ly/3sUkCLA&q... https://abs.twimg.com/emoji/v2/... draggable="false" alt="🧵" title="Thread" aria-label="Emoji: Thread">" class="img-responsive" style="max-width:100%;"/>
After more than 45 years being separated, East and West Germany reunified in 1990.
This was a massive shock, leading to a complete overtake of institutions in East Germany.
What happened following this event?
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This was a massive shock, leading to a complete overtake of institutions in East Germany.
What happened following this event?
2/20
The first few years after reunification, East Germany saw massive wage growth, closing half of the initial gap in just 5 years.
The map below shows wage growth by kreis: in the East wages grew at almost 10% for three years in a row!
What caused this steep wage growth?
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The map below shows wage growth by kreis: in the East wages grew at almost 10% for three years in a row!
What caused this steep wage growth?
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There are many possibilities.
A neoclassical explanation would suggest that labor migrated West, while capital and technology penetrated the East.
While plausible, it may not tell us the full story, as it would predict larger wage growth next to the former border.
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A neoclassical explanation would suggest that labor migrated West, while capital and technology penetrated the East.
While plausible, it may not tell us the full story, as it would predict larger wage growth next to the former border.
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Our story is different.
We argue (w/ data) that labor was misallocated in the GDR (former East) due to the planned economy.
After reunification, the East adopted the labor market institutions of the West, allowing free labor mobility, and letting firms fire workers.
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We argue (w/ data) that labor was misallocated in the GDR (former East) due to the planned economy.
After reunification, the East adopted the labor market institutions of the West, allowing free labor mobility, and letting firms fire workers.
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A well-functioning labor market played its magic with workers moving towards firms that needed them the most, and firms being able to fire mismatched workers.
Aggregate efficiency and wages increased as East Germany was finally exploiting the talent of its citizens.
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Aggregate efficiency and wages increased as East Germany was finally exploiting the talent of its citizens.
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Why do we think that this is an important part of the story?
Lots of evidence in the data suggests so.
Data: universe of social security records from Germany, which allow us to track workers and see their wages as they move across firms, occupations, and locations.
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Lots of evidence in the data suggests so.
Data: universe of social security records from Germany, which allow us to track workers and see their wages as they move across firms, occupations, and locations.
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First, we find that right after the reunification, there was a lot of job mobility in East Germany.
See the maps
https://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten">: workers moved across firms, and across occupations at a higher rate in the East.
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See the maps
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: workers moved across firms, and across occupations at a higher rate in the East.8/N" title="First, we find that right after the reunification, there was a lot of job mobility in East Germany. See the maps https://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten">: workers moved across firms, and across occupations at a higher rate in the East.8/N" class="img-responsive" style="max-width:100%;"/>
We carefully decompose this result in the data.
This extra mobility is not due to migration to the West, nor due to firm exit/entry, nor due to moves through unemployment.
East Germans are simply more likely to make a job-to-job move. Why? Because they could not before!
9/N
This extra mobility is not due to migration to the West, nor due to firm exit/entry, nor due to moves through unemployment.
East Germans are simply more likely to make a job-to-job move. Why? Because they could not before!
9/N
If you are still not convinced, we have two https://abs.twimg.com/emoji/v2/... draggable="false" alt="🚬" title="Rauchzeichen" aria-label="Emoji: Rauchzeichen">https://abs.twimg.com/emoji/v2/... draggable="false" alt="🔫" title="Wasserpistole" aria-label="Emoji: Wasserpistole"> for you!
Our best pieces of evidence come from a comparison across birth cohorts of workers and entry cohorts of firms.
Recall, we claim that adopting West institutions led to reallocation in the East.
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Our best pieces of evidence come from a comparison across birth cohorts of workers and entry cohorts of firms.
Recall, we claim that adopting West institutions led to reallocation in the East.
10/N
If we are correct, we should observe old individuals to be more likely to move since their longer exposure to communist institutions led to worse misallocation: in a competitive market, these older workers would have switched jobs at a younger age.
This is what we find!
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This is what we find!
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All East Germans moved more, but this is especially true for older ones.
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, we plot the job-to-job mobility rate for East (in black) and West (in gray) Germans right after the reunification. All East Germans moved more, but this is especially true for older ones. 12/N" title="https://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten">, we plot the job-to-job mobility rate for East (in black) and West (in gray) Germans right after the reunification. All East Germans moved more, but this is especially true for older ones. 12/N" class="img-responsive" style="max-width:100%;"/>
That graph was for 1992, what does happen over time?
By 1996, cohorts that entered after the reunification showed identical patterns in East and Westhttps://abs.twimg.com/emoji/v2/... draggable="false" alt="➡️" title="Pfeil nach rechts" aria-label="Emoji: Pfeil nach rechts"> evidence that the labor institutions converged!
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By 1996, cohorts that entered after the reunification showed identical patterns in East and West
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evidence that the labor institutions converged!13/N" title="That graph was for 1992, what does happen over time? By 1996, cohorts that entered after the reunification showed identical patterns in East and West https://abs.twimg.com/emoji/v2/... draggable="false" alt="➡️" title="Pfeil nach rechts" aria-label="Emoji: Pfeil nach rechts"> evidence that the labor institutions converged!13/N" class="img-responsive" style="max-width:100%;"/>
The individuals that have been exposed to the GDR still have some extra reallocation, but not as severe since they closed a lot of the allocation gap in the very first few years.
Importantly, the years with fast reallocations are also those with fast wage growth.
14/N
Importantly, the years with fast reallocations are also those with fast wage growth.
14/N
Are you still not convinced? We have a 2nd smoking gun https://abs.twimg.com/emoji/v2/... draggable="false" alt="😉" title="Zwinkerndes Gesicht" aria-label="Emoji: Zwinkerndes Gesicht">!
The figurehttps://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten"> looks at job reallocation of workers among different cohorts of firms.
Firms that entered in East (black) and West (gray) after the reunification showed identical patternshttps://abs.twimg.com/emoji/v2/... draggable="false" alt="➡️" title="Pfeil nach rechts" aria-label="Emoji: Pfeil nach rechts"> institutions converged!
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The figure
Firms that entered in East (black) and West (gray) after the reunification showed identical patterns
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!The figure https://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten"> looks at job reallocation of workers among different cohorts of firms. Firms that entered in East (black) and West (gray) after the reunification showed identical patterns https://abs.twimg.com/emoji/v2/... draggable="false" alt="➡️" title="Pfeil nach rechts" aria-label="Emoji: Pfeil nach rechts"> institutions converged!15/" title="Are you still not convinced? We have a 2nd smoking gun https://abs.twimg.com/emoji/v2/... draggable="false" alt="😉" title="Zwinkerndes Gesicht" aria-label="Emoji: Zwinkerndes Gesicht">!The figure https://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten"> looks at job reallocation of workers among different cohorts of firms. Firms that entered in East (black) and West (gray) after the reunification showed identical patterns https://abs.twimg.com/emoji/v2/... draggable="false" alt="➡️" title="Pfeil nach rechts" aria-label="Emoji: Pfeil nach rechts"> institutions converged!15/" class="img-responsive" style="max-width:100%;"/>
All the excess mobility in the East is between the firms that were already present in the GDR, hence those that have been exposed to the misallocated labor market.
These same firms, by the way, are the ones who see the biggest wage increase, seehttps://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten">.
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These same firms, by the way, are the ones who see the biggest wage increase, see
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. 16/N" title="All the excess mobility in the East is between the firms that were already present in the GDR, hence those that have been exposed to the misallocated labor market. These same firms, by the way, are the ones who see the biggest wage increase, see https://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten">. 16/N" class="img-responsive" style="max-width:100%;"/>
Is the work done? Of course not!
We next need to properly quantify how much the labor reallocation contributed to the aggregate wage growth. For that, we need a structural model, which we are still estimating.
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We next need to properly quantify how much the labor reallocation contributed to the aggregate wage growth. For that, we need a structural model, which we are still estimating.
17/N
For now, we have some wage decomposition that suggest that labor reallocation should have contributed to at least one third of aggregate wage growth.
But stay tuned for more structural results in the next few weeks (or maybe months..).
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But stay tuned for more structural results in the next few weeks (or maybe months..).
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Overall, what have we learned from this unique historical episode?
The literature so far has focused on the persistent effects of institutions --> the past still affects the present.
While very interesting, all those papers do not offer a path to economic growth.
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The literature so far has focused on the persistent effects of institutions --> the past still affects the present.
While very interesting, all those papers do not offer a path to economic growth.
19/N
We hope that our work offers a first proof of concept that institutions can quickly and radically change.
The labor market can be improved, and a proper allocation of talent is crucial for economic prosperity.
Thank you for reading, and share your thoughts, this is WiP!
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The labor market can be improved, and a proper allocation of talent is crucial for economic prosperity.
Thank you for reading, and share your thoughts, this is WiP!
N/N
