We argue that wages have increased so far ahead of labour productivity
in east Germany as to produce a problem that will continue to hound G
erman policy-makers for the next two decades. Despite rapid rates of c
apital accumulation (around 9%) and growth (around 5%) in east Germany
over the coming 10 years, our estimates show that even if wage catch-
up decelerates greatly, as long as it continues, the rate of unemploym
ent in the east will still be twice as high as in the west in another
10 years. Alternatively, if wage discipline forces the eastern unemplo
yment rate to come down to the western level, wage differentials will
widen substantially over these next 10 years, Thus serious problems lo
om ahead.