Was ist am ostdeutschen Arbeitsmarkt anders?

This paper presents and evaluates two interpretations of the eastern German labour market. These interpretations are called ‘wage gap’ and ‘innovation gap’. The former follows standard neoclassical thinking and regards high eastern German unemployment as the consequence of too high a wage level. The latter follows endogenous growth theory and regards a lack of product innovations as the main constraint on output and employment growth in the eastern German economy. The paper argues that the ‘innovation gap’ explains the facts much better than the ‘wage gap’. From this, the paper draws conclusions for economic policy: given the high interregional mobility of the workforce and the erosion of collective bargaining in eastern Germany, the wage level is not an appropriate policy instrument anymore. Instead, policy should aim at strengthening the innovative power of the eastern German economy by supporting research and development in the region. [ABSTRACT FROM AUTHOR]